10-Q 1 tfi10-q6302015.htm 10-Q TFI 10-Q 6302015


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
(Mark One)
 
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly period ended June 30, 2015
OR
o
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: 001-33549
Tiptree Financial Inc.
(Exact name of Registrant as Specified in Its Charter)
Maryland
 
38-3754322
(State or Other Jurisdiction of
 
(IRS Employer
Incorporation of Organization)
 
Identification No.)
 
 
 
 
 
 
780 Third Avenue, 21st Floor, New York, New York
 
10017
(Address of Principal Executive Offices)
 
(Zip Code)
(212) 446-1400
(Registrant’s Telephone Number, Including Area Code)
Not applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of 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   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨                    Accelerated filer ¨
Non-accelerated filer ¨                    Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No  x

As of August 10, 2015, there were 33,397,554 shares, par value $0.001, of the registrant’s Class A common stock outstanding and 9,766,537 shares, par value $0.001, of the registrant’s Class B common stock outstanding.





Tiptree Financial Inc.
Quarterly Report on Form 10-Q
June 30, 2015
Table of Contents

ITEM
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. FINANCIAL INFORMATION


Item 1. Financial Statements (Unaudited)



TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except shares and per share data)

 
As of

June 30, 2015
 
December 31, 2014
Assets
(Unaudited)
 
As adjusted
Cash and cash equivalents – unrestricted
$
170,100

 
$
52,987

Cash and cash equivalents – restricted
30,085

 
28,045

Trading assets, at fair value
31,824

 
30,163

Investments in available for sale securities, at fair value (amortized cost: $180,683 at June 30, 2015 and $171,679 at December 31, 2014)
179,772

 
171,128

Mortgage loans held for sale, at fair value (pledged as collateral: $55,498 at June 30, 2015 and $28,049 at December 31, 2014)
56,417

 
28,661

Investments in loans, at fair value
63,718

 
2,601

Loans owned, at amortized cost – net of allowance
51,439

 
36,095

Notes receivable, net
21,647

 
21,916

Accounts and premiums receivable, net
56,947

 
39,666

Reinsurance receivables
300,065

 
264,776

Investments in partially-owned entities
113

 
2,451

Real estate
208,565

 
131,308

Intangible assets
103,607

 
120,394

Other receivables
46,565

 
36,068

Goodwill
92,118

 
92,118

Other assets
76,131

 
36,875

Assets of consolidated CLOs
1,883,030

 
1,978,094

Assets held for sale
—

 
5,129,745

Total assets
$
3,372,143

 
$
8,203,091

Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Trading liabilities, at fair value
$
22,371

 
$
22,573

Debt
464,372

 
363,199

Unearned premiums
333,560

 
299,826

Policy liabilities
69,638

 
63,365

Deferred revenue
65,594

 
45,393

Deferred tax liabilities
32,473

 
45,925

Commissions payable
6,904

 
12,983

Other liabilities and accrued expenses
135,876

 
63,928

Liabilities of consolidated CLOs
1,835,238

 
1,877,377

Liabilities held for sale and discontinued operations
771

 
5,006,901

Total liabilities
$
2,966,797

 
$
7,801,470

Commitments and contingencies (Note 16)

 

 
 
 
 
Stockholders’ Equity:
 
 
 
Preferred stock: $0.001 par value, 100,000,000 shares authorized, none issued or outstanding
$
—

 
$
—

Common stock - Class A: $0.001 par value, 200,000,000 shares authorized, 31,764,200 and 31,830,174 shares issued and outstanding respectively
32

 
32

Common stock - Class B: $0.001 par value, 50,000,000 shares authorized, 9,766,537 and 9,770,367 shares issued and outstanding respectively
10

 
10

Additional paid-in capital
271,189

 
271,090

Accumulated other comprehensive income
(265
)
 
(49
)
Retained earnings
25,758

 
13,379

Total stockholders’ equity of Tiptree Financial Inc.
296,724

 
284,462

Non-controlling interests (including $92,968 and $90,144 attributable to Tiptree Financial Partners, L.P., respectively)
108,622

 
117,159

Total stockholders’ equity
405,346

 
401,621

Total liabilities and stockholders’ equity
$
3,372,143

 
$
8,203,091

See accompanying notes to consolidated financial statements.

Page F-2
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
(in thousands, except shares and per share data)



Three months ended June 30,
 
Six months ended June 30,

2015
 
2014
 
2015

2014
Revenues:
 
 
As adjusted
 
 
 
As adjusted
Net realized and unrealized gains (losses) on investments
$
443

 
$
(29
)
 
$
222

 
$
875

Net realized and unrealized gains on mortgage pipeline and associated hedging instruments
368

 
105

 
719

 
190

Interest income
2,867

 
3,184

 
5,163

 
7,176

Net credit derivative losses
(444
)
 
(1,257
)
 
(534
)
 
(1,521
)
Service and administrative fees
25,545

 
—

 
47,472

 
—

Ceding commissions
10,148

 
—

 
20,085

 
—

Earned premiums, net
39,707

 
—

 
77,060

 
—

Gain on sale of loans held for sale, net
4,005

 
1,759

 
6,598

 
2,734

Loan fee income
1,882

 
980

 
3,281

 
1,409

Rental revenue
11,191

 
4,383

 
20,560

 
8,839

Other income
3,467

 
515

 
6,563

 
804

Total revenue
99,179

 
9,640

 
187,189

 
20,506

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Interest expense
6,194

 
2,643

 
11,323

 
5,457

Payroll and employee commissions
23,429

 
7,297

 
43,770

 
13,012

Commission expense
23,927

 
—

 
40,455

 
—

Member benefit claims
8,240

 
—

 
15,819

 
—

Net losses and loss adjustment expenses
12,926

 
—

 
25,376

 
—

Professional fees
3,671

 
1,916

 
8,299

 
2,990

Depreciation and amortization expenses
11,359

 
1,662

 
26,823

 
3,330

Acquisition costs
—

 
—

 
1,349

 
—

Other expenses
12,929

 
2,437

 
24,073

 
5,015

Total expense
102,675

 
15,955

 
197,287

 
29,804

 
 
 
 
 
 
 
 
Results of consolidated CLOs:
 
 
 
 
 
 
 
Income attributable to consolidated CLOs
19,033

 
18,083

 
34,696

 
32,698

Expenses attributable to consolidated CLOs
17,117

 
11,012

 
32,038

 
20,984

Net Income attributable to consolidated CLOs
1,916

 
7,071

 
2,658

 
11,714

(Loss) income before taxes from continuing operations
(1,580
)
 
756

 
(7,440
)
 
2,416

Less: Provision (benefit) for income taxes
(371
)
 
(1,080
)
 
(1,867
)
 
(1,732
)
 (Loss) income from continuing operations
(1,209
)
 
1,836

 
(5,573
)
 
4,148

 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations, net
4,654

 
2,186

 
6,999

 
3,476

Gain on sale of discontinued operations, net
16,349

 
—

 
16,349

 
—

Discontinued operations, net
21,003

 
2,186

 
23,348

 
3,476

Net income before non-controlling interests
19,794

 
4,022

 
17,775

 
7,624

Less: net income attributable to noncontrolling interests - Tiptree Financial Partners, L.P.
4,735

 
2,245

 
3,875

 
4,551

Less: net income (loss) attributable to noncontrolling interests - Other
97

 
(262
)
 
(83
)
 
(592
)
Net income available to common stockholders
$
14,962

 
$
2,039

 
$
13,983

 
$
3,665

 
 
 
 
 
 
 
 
Net income (loss) per Class A common share:
 
 
 
 
 
 
 
Basic, continuing operations, net
$
(0.03
)
 
$
0.14

 
$
(0.11
)
 
$
0.27

Basic, discontinued operations, net
0.50

 
0.05

 
0.55

 
0.08

Net income basic
0.47

 
0.19

 
0.44

 
0.35

 
 
 
 
 
 
 
 
Diluted, continuing operations, net
(0.03
)
 
0.14

 
(0.11
)
 
0.27

Diluted, discontinued operations, net
0.50

 
0.05

 
0.55

 
0.08

Net income dilutive
$
0.47

 
$
0.19

 
$
0.44

 
$
0.35

 
 
 
 
 
 
 
 
Weighted average number of Class A common shares:
 
 
 
 
 
 
 
Basic
31,881,904

 
10,617,863

 
31,962,065

 
10,602,311

Diluted
31,881,904

 
10,617,863

 
31,962,065

 
10,602,311

See accompanying notes to consolidated financial statements.

Page F-3

TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands)



 
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
As adjusted
 
 
 
As adjusted
Net income before non-controlling interests
$
19,794

 
$
4,022

 
$
17,775

 
$
7,624

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale securities:
 
 
 
 
 
 
 
Unrealized holding (losses) gains arising during the period
(2,292
)
 
112

 
(645
)
 
200

Related tax benefit (expense)
808

 
(39
)
 
223

 
(70
)
Reclassification of losses (gains) included in net income
56

 
19

 
41

 
14

Related tax expense (benefit)
(19
)
 
(7
)
 
(14
)
 
(5
)
Unrealized (losses) gains on available-for-sale securities, net of tax
(1,447
)
 
85

 
(395
)
 
139

 
 
 
 
 
 
 
 
Interest rate swap:
 
 
 
 
 
 
 
Unrealized (loss) on interest rate swap
(55
)
 
—

 
(289
)
 
—

Related tax benefit
19

 
—

 
101

 
—

Reclassification of losses included in net income
283

 
—

 
564

 
—

Related tax (benefit)
(99
)
 
—

 
(197
)
 
—

Unrealized gain on interest rate swap, net of tax
148

 
—

 
179

 
—

 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax
(1,299
)
 
85

 
(216
)
 
139

Comprehensive income
18,495

 
4,107

 
17,559

 
7,763

Less: net income attributable to noncontrolling interests - Tiptree Financial Partners, L.P.
4,735

 
2,245

 
3,875

 
4,551

Less: net income (loss) attributable to noncontrolling interests - Other
97

 
(262
)
 
(83
)
 
(592
)
Total comprehensive income available to common stockholders
$
13,663

 
$
2,124

 
$
13,767

 
$
3,804














See accompanying notes to consolidated financial statements

Page F-4

TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(in thousands, except shares)


 
Number of Shares
 
Par Value
 
 
 
 
 
 
 
 
 
 
 
 
 
Class A
 
Class B
 
Class A
 
Class B
 
Additional paid in capital
 
Accumulated
other
comprehensive
income (loss)
 
Retained
earnings
 
Non-controlling
interests - Tiptree Financial Partners, L.P.
 
Non-controlling
interests - Other
 
Total
 
 
 
 
 
 
 
 
 
As adjusted
 
 
 
As adjusted
 
 
 
As adjusted
 
As adjusted
Balance at December 31, 2014
31,830,174

 
9,770,367

 
$
32

 
$
10

 
$
271,090

 
$
(49
)
 
$
13,379

 
$
90,144

 
$
27,015

 
$
401,621

Stock-based compensation to directors, employees and other persons for services rendered
270,025

 
—

 
—

 
—

 
2,097

 
—

 
—

 
—

 
—

 
2,097

Class A shares issued and Class B shares redeemed due to TFP unit redemptions
3,830

 
(3,830
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other comprehensive loss, net of tax
—

 
—

 
—

 
—

 
—

 
(216
)
 
—

 
—

 
—

 
(216
)
Non-controlling interest contributions to Care subsidiary
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2,229

 
2,229

Non-controlling interest distributions from Care subsidiary
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(227
)
 
(227
)
Shares purchased under stock purchase plan
(339,829
)
 
—

 
—

 
—

 
(2,393
)
 
—

 
—

 
—

 
—

 
(2,393
)
Reduction in non-controlling interest due to PFG Disposition
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(7,771
)
 
(7,771
)
Net changes in non-controlling interest
—

 
—

 
—

 
—

 
395

 
—

 
—

 
(563
)
 
(5,509
)
 
(5,677
)
Dividends declared
—

 
—

 
—

 
—

 
—

 
—

 
(1,604
)
 
(488
)
 
—

 
(2,092
)
Net (loss) income
—

 
—

 
—

 
—

 
—

 
—

 
13,983

 
3,875

 
(83
)
 
17,775

Balance at June 30, 2015
31,764,200

 
9,766,537

 
$
32

 
$
10

 
$
271,189

 
$
(265
)
 
$
25,758

 
$
92,968

 
$
15,654

 
$
405,346










See accompanying notes to consolidated financial statement

Page F-5
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)



 
Six months ended June 30,
 
2015
 
2014
 
 
 
As adjusted
Cash flows from operating activities:
 
 
 
Net income available to common stockholders
$
13,983

 
$
3,665

Net income attributable to noncontrolling interests - Tiptree Financial Partners, L.P.
3,875

 
4,551

Net (loss) attributable to noncontrolling interests - Other
(83
)
 
(592
)
Net income
17,775

 
7,624

Discontinued operations, net
(23,348
)
 
(3,476
)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Net realized and unrealized (gain) loss
(7,106
)
 
(2,178
)
Non cash compensation expense
—

 
547

Increase in non cash interest from investments in loans
—

 
(198
)
Amortization/accretion of premiums and discounts
1,315

 
(141
)
Depreciation and amortization expense
26,823

 
3,410

Provision for loan losses
140

 
—

Amortization and write off of deferred financing costs
457

 
91

Increase in unearned premiums from acquisitions
33,735

 
—

Increase in other liabilities and accrued expenses
50,225

 
64,779

Loss/(income) from investments in partially-owned entities, net
63

 
(680
)
Loans originated for sale
(379,583
)
 
(165,730
)
Proceeds from sale of loans
358,729

 
164,962

Increase in reinsurance receivables
(35,289
)
 
—

Deferred tax expense
(11,156
)
 
(3,209
)
(Increase) in other assets
(57,452
)
 
(4,067
)
Increase in unpaid claims
7,541

 
—

(Decrease) in policy holder accounts
(1,268
)
 
—

Operating activities from CLOs
17,004

 
(625
)
Cash (used in) provided by operating activities - continuing operations
(1,395
)
 
61,109

Cash provided by (used in) operating activities - discontinued operations
(6,198
)
 
(3,633
)
Net cash (used in) provided by operating activities
(7,593
)
 
57,476

Cash flows from investing activities:
 
 
 
Purchases of trading securities and loans carried at fair value
(64,159
)
 
(203,313
)
Proceeds from sales of trading securities and loans carried at fair value
3,240

 
248,603

Purchases of available for sale securities
(28,373
)
 
—

Proceeds from maturities, calls, and prepayments of available for sale securities
16,405

 
—

Proceeds from sales of available for sale securities
1,733

 
—

Purchases of derivatives
—

 
(986
)
Purchases of real estate
(83,698
)
 
(96
)
Purchases of fixed assets
(2,211
)
 
(17
)
Net proceeds from the sale of subsidiaries
113,807

 
—

Proceeds from loan repayments/disposal of loans
1,069

 
648

(Decrease) increase in restricted cash
(2,040
)
 
3,601

Acquisitions, net cash
(3,000
)
 
6,689

Change in noncontrolling interest
2,003

 
—

Proceeds from distributions paid by partially owned entities
2,275

 
210

Change due to consolidation of trusts
—

 
(69
)
Investing activities from CLOs
57,991

 
(298,199
)
Cash provided by (used in) investing activities - continuing operations
15,042

 
(242,929
)
Cash provided by investing activities from discontinued operations
11,866

 
8,423

Net cash provided by (used in) investing activities
26,908

 
(234,506
)

Page F-6
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)



 
Six months ended June 30,
 
2015
 
2014
 
 
 
As adjusted
Cash flows from financing activities:
 
 
 
Dividends paid
(2,094
)
 
—

Payment of debt issuance costs
(1,839
)
 
(264
)
Proceeds from loans and mortgage notes payable
499,921

 
219,856

Principal paydowns of loans and mortgage notes payable
(398,835
)
 
(318,072
)
Proceeds from issuance of common units of subsidiaries
1,772

 
—

Repurchase of common stock
(2,393
)
 
—

Financing activities from CLOs
(22,095
)
 
280,003

Cash provided by financing activities - continuing operations
74,437

 
181,523

Cash (used in) financing activities - discontinued operations
(5,000
)
 
(3,000
)
Net cash provided by financing activities
69,437

 
178,523

Net increase in cash
88,752

 
1,493

Cash and cash equivalents – unrestricted – beginning of period
81,348

 
120,557

Cash and cash equivalents – unrestricted – end of period
170,100

 
122,050

Less: Reclassification of cash to assets held for sale
—

 
24,702

Cash and cash equivalents of continuing operations – unrestricted – end of period
$
170,100

 
$
97,348

 
 
 
 
Noncash investing and financing activities:
 
 
 
Capital change due to equity compensation
$
2,097

 
$
578

     Net assets related to acquisitions
$
—

 
$
(3,275
)






























See accompanying notes to consolidated financial statements.

Page F-7
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)


Basis of Presentation
The accompanying unaudited consolidated financial statements of Tiptree Financial Inc. (Tiptree and, together with its consolidated subsidiaries, collectively, the Company) have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP). The consolidated financial statements are presented in U.S. dollars, the main operating currency of the Company. The unaudited consolidated financial statements presented herein should be read in conjunction with the annual audited financial statements included in the Company’s Form 10-K for the fiscal year ended December 31, 2014. In the opinion of management, the accompanying unaudited interim financial information reflects all adjustments, including normal recurring adjustments necessary to present fairly the Company’s financial position, results of operations, comprehensive income and cash flows for each of the interim periods presented. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the full year ending on December 31, 2015.

(1) Organization

Tiptree is a Maryland Corporation that was incorporated on March 19, 2007. Until July 1, 2013, Tiptree operated under the name Care Investment Trust Inc. (which, for the period prior to July 1, 2013, we refer to as Care Inc.). Tiptree is a diversified holding company which conducts its operations through Tiptree Operating Company, LLC (the Operating Company). Tiptree’s primary focus is on five reporting segments: insurance and insurance services, specialty finance, real estate, asset management, and corporate and other.

As of June 30, 2015, Tiptree owns, directly or indirectly, approximately 77% of the assets of Operating Company with the remaining 23% held by non-controlling shareholders through their interests in Tiptree Financial Partners, L.P. (TFP). The limited partners of TFP (other than Tiptree itself) have the ability to exchange TFP partnership units for Tiptree Class A common stock at a rate of 2.798 shares of Class A common stock per partnership unit. The percentage of TFP (and therefore Operating Company) owned by Tiptree may increase in the future to the extent TFP’s limited partners choose to exchange their limited partnership units of TFP for Class A common stock of Tiptree.
Tiptree’s Class A Common Stock is traded on the NASDAQ Capital Market under the symbol “TIPT”.

2015 Transactions

On January 1, 2015, Fortegra exercised an option to purchase the remaining 37.6% ownership interest in ProtectCELL it did not own and now owns 100% of ProtectCELL. Fortegra made an initial payment of $3,000 to exercise the option, with the remaining amount payable upon final determination of the option purchase price.

On January 26, 2015, Tiptree entered into a first amendment to its existing credit agreement with Fortress Credit Corp. (Fortress) (the Amendment), providing for additional term loans in an aggregate principal amount of $25,000 to Tiptree. Tiptree repaid $25,000 of all aggregate outstanding loans under the Fortress credit agreement upon the closing of the sale of Philadelphia Financial Group Inc. (PFG) on June 30, 2015.

On February 9, 2015, affiliates of Care entered into a joint venture to own and operate five seniors housing communities with affiliates of Royal Senior Care Management LLC (Royal). The joint venture acquired the communities for $30,052. Affiliates of Care own an 80% interest in the joint venture, while affiliates of Royal own the remaining 20% interest and provide management services to the communities under management contracts. In connection with the acquisition, Care and Royal secured a $22,500 five year loan (subject to a holdback), which includes 36 months of interest only payments and an additional $2,000 commitment that will be available between February 9, 2016 and February 9, 2019, subject to certain conditions.

On March 30, 2015, affiliates of Care acquired six seniors housing communities for $54,788. The properties are leased to affiliates of Greenfield Holdings, LLC that will operate the properties. In connection with the acquisition, Care secured a $39,500, 10 year loan (subject to a holdback), which includes 18 months of interest only payments. As of June 30, 2015, the loan had an aggregate balance of $38,700.

On May 5, 2015, Tiptree invested $25,000 in Telos Credit Opportunities Fund, L.P., a leveraged loan fund managed by Tiptree’s Telos Asset Management LLC subsidiary.


Page F-8
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

On May 5, 2015, Tiptree, through a Delaware statutory trust, invested approximately $9,726 in a pool of non-performing residential real estate mortgages and entered into an agreement with an asset management firm to service the portfolio. As of June 30, 2015, the Company’s investments included $60 of foreclosed residential real estate property and $9,351 of loans collateralized by real estate in the process of foreclosure.

On June 30, 2015, Tiptree completed the sale of all of the issued and outstanding capital stock of PFG Holdings Acquisition Corp. (PHAC) and Philadelphia Financial Group, Inc. (PFG) to PFG Acquisition Corp. (Buyer), an entity affiliated with The Blackstone Group L.P. Tiptree received cash consideration of $142,837 for its equity interests in PHAC and PFG. Under the Purchase Agreement, Buyer will pay to Tiptree an additional amount of approximately $7,341, one-third of which will be made on the first anniversary of the closing and two-thirds of which will be made on the second anniversary of the closing.

2014 Transactions
In December 2014, the Company completed the acquisition of Fortegra Financial Corporation (Fortegra), and paid $211,740 for 100% ownership. Fortegra is consolidated within the Company’s insurance and insurance services segment. The assets acquired were valued at $771,559, which includes $115,000 of intangible assets and $90,213 of goodwill.

In December 2014, affiliates of Care entered into a joint venture to own and operate an additional seniors housing community with affiliates of Heritage. Affiliates of Care own an 80% interest in the joint venture, while affiliates of Heritage own the remaining 20% interest and continue to provide management services to the communities under a management contract.

In October 2014, affiliates of Care entered into a joint venture to own and operate three seniors housing communities with affiliates of Greenfield. Care owns an 80% interest in the joint venture, while affiliates of Greenfield own the remaining 20% interest and provide management services to the communities under a management contract.

The Company completed the acquisition of 67.5% of Luxury Mortgage Corp. (Luxury) in January 2014. Luxury is consolidated within the Company’s financial statements and is reported within Tiptree’s specialty finance segment.

(2) Summary of Significant Accounting Policies

Basis of Presentation
The unaudited interim consolidated financial statements of the Company have been prepared using the accounting policies set forth in Note 2 of the Notes to Consolidated Financial Statements included in the Company’s 2014 Annual Report on Form 10-K.

Reclassifications
Certain prior period amounts have been reclassified to conform to the current year presentation.

Principles of Consolidation
The consolidated financial statements reflect the consolidated accounts of Tiptree and (i) its wholly-owned subsidiaries, (ii) subsidiaries in which it has a controlling interest, and (iii) certain other entities known as variable interest entities (VIEs) in which Tiptree, through its subsidiaries, is deemed to be the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. This consolidation, particularly with respect to the VIEs, significantly impacts these consolidated financial statements.

Certain changes to the consolidated balance sheet amounts for December 31, 2014 have been made in accordance with accounting for business combinations, to reflect the retrospective adjustments made during the measurement period, to the preliminary amounts recorded for the estimated fair value of acquired net assets. Please see Note 4—Business Acquisitions, for more information on the measurement period adjustments.

Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. The estimates and assumptions most susceptible to change are the valuation of securities, loans, derivative positions, deferred income taxes and acquired assets and liabilities. Although these and other estimates and assumptions are based on the best available estimates, actual results could differ materially from management’s estimates.


Page F-9
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

Discontinued Operations
As a result of recent accounting guidance (see ASU 2014-08 below), for periods beginning on or after December 15, 2014, the results of operations of a business of the Company that have either been disposed of or are classified as held-for-sale are reported in discontinued operations if the disposal of the business represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. For such businesses that have been disposed of prior to December 15, 2014, the Company presents the operations of the business as discontinued operations, and retrospectively reclassifies operating results for all prior periods presented. The Company carries assets and liabilities held for sale at the lower of carrying value on the date the asset is initially classified as held for sale or fair value less costs to sell. At the time of reclassification to held for sale, the Company ceased recording depreciation on assets transferred.

Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss) and other items of comprehensive income (loss). These other items are generally comprised of unrealized gains and losses on investment securities classified as available-for-sale and unrealized gains and losses on interest rate swaps, net of the related tax effects.

Recent Accounting Standards

Recently Adopted Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40), Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure. This amendment clarifies when an in substance repossession or foreclosure has occurred. Additionally, this amendment requires disclosure of the amount of foreclosed residential real estate property held and the recorded investment in consumer mortgage loans collateralized by residential real estate that are in the process of foreclosure. The adoption of ASU 2014-04 did not have an impact on the Company's consolidated financial position, results of operations and cash flows.
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. These amendments change the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. In addition, ASU 2014-08 requires expanded disclosures about discontinued operations that will provide financial statement users with more information. ASU 2014-08 is effective for the first quarter of 2015 for the Company. The effects of applying the revised guidance will vary based upon the nature and size of future disposal transactions. It is expected that fewer disposal transactions will meet the new criteria to be reported as discontinued operations.

In August 2014, the FASB issued ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity. This pronouncement is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. ASU 2014-13 provides for a measurement alternative whereby a company can measure both the financial assets and financial liabilities of its CLOs using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. The Company elected to early adopt ASU 2014-13 for the year ended December 31, 2014 as it pertains to the CLOs it consolidates and elected to apply it retrospectively to all relevant prior periods. The application of this new guidance resulted in adjustments to certain balances in the previously issued consolidated balance sheets, consolidated statements of operations, and consolidated statements of cash flows for the year ended December 31, 2014, as well as for the interim periods ending March 31, 2014, June 30, 2014, and September 30, 2014. Please see Note 3—Out of Period Adjustments, Changes in Accounting Principles and Reclassifications, for more information on the ASU 2014-13 adoption.

In May 2015, the FASB issued ASU 2015-08, Business Combinations (Topic 805): Pushdown Accounting—Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115  (SEC Update). ASU 2015-08 removes references to the SEC’s SAB Topic 5.J on pushdown accounting from ASC 805-50. The Commission’s Staff Accounting Bulletin, "SAB" 115 had superseded the guidance in SAB Topic 5.J in connection with the FASB’s November 2014 release of ASU 2014-17. The amendments in ASU 2015-08 therefore conform to the FASB’s guidance on pushdown accounting with the SEC’s. The amendments are effective upon issuance (May 12, 2015). The adoption of this standard did not have a material impact on the Company's consolidated financial position, results of operations and cash flows.


Page F-10
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this standard affects any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This standard was originally effective for the Company on January 1, 2017. On July 9, 2015, the FASB decided to delay the effective date of ASU 2014-09 by one year. Reporting entities may choose to adopt the standard as of the original effective date. The deferral results in ASU 2014-09 being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently reviewing ASU 2014-09 and is assessing the potential effects on its consolidated financial position, results of operations and cash flows.

In June 2014, the FASB issued ASU 2014-12 Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period shall be treated as a performance condition. ASU 2014-12 will be effective for the Company on January 1, 2016. The Company is currently evaluating the effect upon its financial statements.

In January 2015, the FASB issued ASU 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. The pronouncement eliminates the concept of extraordinary items from GAAP. However, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. ASU 2015-01 will be effective for the annual and interim periods beginning after December 15, 2015 with early adoption permitted. The Company is currently evaluating the effect upon its financial statements.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which amends the consolidation requirements in the FASB Accounting Standards Codification 810, Consolidation. ASU 2015-02 makes targeted amendments to the current consolidation guidance for VIEs, which could change consolidation conclusions. ASU 2015-02 will be effective for the Company on January 1, 2016 and early adoption is permitted. The Company is currently evaluating the effect upon its financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability and consistent with debt discounts. ASU 2015-03 requires retrospective adoption and will be effective for the Company on January 1, 2016 and early adoption is permitted. The Company is currently evaluating the effect upon its financial statements.

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which eliminates the requirement for entities to categorize within the fair value hierarchy investments for which fair values are measured at net asset value (NAV) per share (FASB ASC Subtopic 820-10).  ASU 2015-07 also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the NAV per share practical expedient, instead limiting disclosures to investments for which the entity has elected the expedient.  ASU 2015-07 is effective for the Company on January 1, 2016 and early adoption is permitted and retrospective adoption is required.  The Company is currently evaluating the effect upon its financial statements.

In May 2015, the FASB issued ASU 2015-09, Financial Services—Insurance (Topic 944): Disclosures about Short-Duration Contracts, which expands the disclosure requirements for insurance companies that issue short-duration contracts (typically one year or less) to provide users with additional disclosures about the liability for unpaid claims and claim adjustment expenses and to increase the transparency of the significant estimates management makes in measuring those liabilities. In addition, the disclosures will serve to increase insight into an insurance entity’s ability to underwrite and anticipate costs associated with claims as well as provide users of the financial statements a better understanding of the amount and uncertainty of cash flows arising from insurance liabilities, the nature and extent of risks on short-duration contracts and the timing of cash flows arising from insurance liabilities. ASU 2015-09 will be effective for the Company for the annual period beginning after December 15, 2015, and for interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the effect upon its financial statements.


Page F-11
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements, which covers a wide range of Topics in the Codification. The amendments in ASU 2015-10 represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost on most entities. Amendments with transition guidance are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. All other amendments are effective upon the ASU’s issuance (June 12, 2015). The Company does not anticipate that the adoption of this standard will have a material impact on its consolidated financial position, results of operations and cash flows.

(3) Out of Period Adjustments, Changes in Accounting Principles and Reclassifications

Management is presenting these tables to provide a clear understanding of out of period adjustments, the adoption of accounting principles and reclassifications to the Company’s historical results for the three and six months ended June 30, 2014.

As it relates to the statement of income for the year ended June 30, 2015, the Company has revised its prior year financial statements for an immaterial uncorrected misstatement. The revision, related to the Company’s real estate segment, increased depreciation and amortization expense by $1,704, and decreased net (loss) income attributable to noncontrolling interests - Tiptree Financial Partners, L.P. by $1,016 and decreased net (loss) income attributable to noncontrolling interests - Other by $340. The effects of these adjustments are presented below.

As it relates to the Statements of Cash Flows, the Company has revised its prior year presentation for an immaterial uncorrected misstatement. This revision, related to the presentation of its activities from CLOs, reduced operating activities from CLOs by $43,162 and increased investing activities from CLOs by $43,162.
As mentioned in Note 2, in the Annual Report on Form 10-K for 2014, the Company elected to early adopt ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity. The effects of these adjustments are presented below.

The sale of PFG is a transaction that qualifies to be treated as discontinued operations. This reclassification is reflected below (see Note 5—Dispositions, Assets Held for Sale and Discontinued Operations).

Certain prior period amounts have been reclassified to conform to the current year presentation. These amounts are identified under the reclassification heading in the tables below.
For the three months ended June 30, 2014
 
 
As previously filed
 
Out of period adjustments
 
ASU 2014-13 adoption
 
Discontinued operations
 
Reclassifications(1)
 
As adjusted
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Net realized (loss) gain on investments
 
$
(1,044
)
 
$
—

 
$
—

 
$
5

 
$
1,039

 
$
—

Change in unrealized appreciation on investments
 
(227
)
 
—

 
—

 
(14
)
 
241

 
—

Income from investments in partially owned entities
 
336

 
—

 
—

 
—

 
(336
)
 
—

Net realized and unrealized gains
 
(935
)
 
—

 
—

 
(9
)
 
944

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Net realized and unrealized gains from investments
 
—

 
—

 
—

 
—

 
(29
)
 
(29
)
Net realized and unrealized gains on mortgage pipeline and associated hedging instruments
 
—

 
—

 
—

 
—

 
105

 
105

Interest income
 
4,938

 
—

 
—

 
(1,145
)
 
(609
)
 
3,184

Gain on sale of loans held for sale, net
 
1,782

 
—

 
—

 
—

 
(23
)
 
1,759

Net Credit derivative losses
 
—

 
—

 
—

 
—

 
(1,257
)
 
(1,257
)
Separate account fees
 
5,525

 
—

 
—

 
(5,525
)
 
—

 
—

Administrative service fees
 
12,589

 
—

 
—

 
(12,589
)
 
—

 
—

Loan fee income
 
—

 
—

 
—

 
—

 
980

 
980

Rental revenue
 
4,393

 
—

 
—

 
—

 
(10
)
 
4,383

Other income
 
1,137

 
—

 
—

 


 
(622
)
 
515


Page F-12
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

For the three months ended June 30, 2014
 
 
As previously filed
 
Out of period adjustments
 
ASU 2014-13 adoption
 
Discontinued operations
 
Reclassifications(1)
 
As adjusted
Total revenue
 
29,429


—


—


(19,268
)

(521
)

9,640

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
6,259

 
—

 
—

 
(2,896
)
 
(720
)
 
2,643

Payroll expense
 
12,513

 
—

 
—

 
(4,788
)
 
(428
)
 
7,297

Professional fees
 
2,824

 
—

 
—

 
(734
)
 
(174
)
 
1,916

Change in future policy benefits
 
1,072

 
—

 
—

 
(1,072
)
 
—

 
—

Mortality expenses
 
2,583

 
—

 
—

 
(2,583
)
 
—

 
—

Commission expense
 
174

 
—

 
—

 
(584
)
 
410

 
—

Depreciation and amortization expenses
 
1,803

 
852

 
—

 
(937
)
 
(56
)
 
1,662

Other expenses
 
3,901

 
—

 
—

 
(1,911
)
 
447

 
2,437

Total expenses
 
31,129

 
852

 
—

 
(15,505
)
 
(521
)
 
15,955

Results of consolidated CLOs:
 
 
 
 
 
 
 
 
 
 
 
 
Income attributable to consolidated CLOs
 
12,849

 
—

 
5,234

 
—

 
—

 
18,083

Expenses attributable to consolidated CLOs
 
14,997

 
—

 
(3,985
)
 
—

 
—

 
11,012

Net (loss) income attributable to consolidated CLOs
 
(2,148
)
 
—

 
9,219

 
—

 
—

 
7,071

(Loss) income before taxes from continuing operations
 
(3,848
)
 
(852
)
 
9,219

 
(3,763
)
 
—

 
756

Provision (benefit) for income taxes
 
497

 
—

 
—

 
(1,577
)
 
—

 
(1,080
)
(Loss) income from continuing operations
 
(4,345
)
 
(852
)
 
9,219

 
(2,186
)
 
—

 
1,836

Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
 
Income from discontinued operations, net
 
—

 
—

 
—

 
2,186

 
—

 
2,186

Discontinued operations, net
 
—

 
—

 
—

 
2,186

 
—

 
2,186

Net (loss) income before noncontrolling interest
 
(4,345
)
 
(852
)
 
9,219

 
—

 
—

 
4,022

Less: net (loss) income attributable to noncontrolling interests
 
(747
)
 
—

 
449

 
—

 
298

 
—

Less net (loss) income attributable to VIE subordinated noteholders
 
(4,669
)
 
—

 
4,669

 
—

 
—

 
—

Less: net (loss) income attributable to noncontrolling interests - Tiptree Financial Partners, L.P.
 
—

 
(508
)
 
2,753

 
—

 
—

 
2,245

Less: net (loss) income attributable to noncontrolling interests - Other
 
—

 
(170
)
 
206

 
—

 
(298
)
 
(262
)
Net income available to common stockholders
 
$
1,071

 
$
(174
)
 
$
1,142

 
$
—

 
$
—

 
$
2,039

 
 
 
 


 
 
 
 
 
 
 
 
Basic, continuing operations, net
 
$
0.10

 
$
(0.02
)
 
$
0.11

 
$
(0.05
)
 
$
—

 
$
0.14

Basic, discontinued operations, net
 
—

 
—

 
—

 
0.05

 
—

 
0.05

Net income basic
 
$
0.10

 
$
(0.02
)
 
$
0.11

 
$
—

 
$
—

 
$
0.19

 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted, continuing operations, net
 
$
0.10

 
$
(0.02
)
 
$
0.11

 
$
(0.05
)
 
$
—

 
$
0.14

Diluted, discontinued operations, net
 
—

 
—

 
—

 
0.05

 
—

 
0.05

Net income, diluted
 
$
0.10

 
$
(0.02
)
 
$
0.11

 
$
—

 
$
—

 
$
0.19


For the six months ended June 30, 2014
 
 
As previously filed
 
Out of period adjustments
 
ASU 2014-13 adoption
 
Discontinued operations
 
Reclassifications (1)
 
As adjusted
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 

Page F-13
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

For the six months ended June 30, 2014
 
 
As previously filed
 
Out of period adjustments
 
ASU 2014-13 adoption
 
Discontinued operations
 
Reclassifications (1)
 
As adjusted
Net realized (loss) gain on investments
 
$
(902
)
 
$
—

 
$
—

 
$
—

 
$
902

 
$
—

Change in unrealized appreciation on investments
 
289

 
—

 
—

 
(14
)
 
(275
)
 
—

Income from investments in partially owned entities
 
680

 
—

 
—

 
—

 
(680
)
 
—

Net realized and unrealized gains
 
67

 
—

 
—

 
(14
)
 
(53
)
 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Net realized and unrealized gains from investments
 
—

 
—

 
—

 
—

 
875

 
875

Net realized and unrealized gains on mortgage pipeline and associated hedging instruments
 
—

 
—

 
—

 
—

 
190

 
190

Interest income
 
10,301

 
—

 
—

 
(2,333
)
 
(792
)
 
7,176

Gain on sale of loans held for sale, net
 
2,734

 
—

 
—

 
—

 
—

 
2,734

Net Credit derivative losses
 
—

 
—

 
—

 
—

 
(1,521
)
 
(1,521
)
Separate account fees
 
11,012

 
—

 
—

 
(11,012
)
 
—

 
—

Administrative service fees
 
24,941

 
—

 
—

 
(24,941
)
 
—

 
—

Loan fee income
 
—

 
—

 
—

 
—

 
1,409

 
1,409

Rental revenue
 
8,839

 
—

 
—

 
—

 
—

 
8,839

Other income
 
1,867

 
—

 
—

 
(1
)
 
(1,062
)
 
804

Total revenue
 
59,761


—


—


(38,301
)

(954
)

20,506

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
12,221

 
—

 
—

 
(5,810
)
 
(954
)
 
5,457

Payroll expense
 
23,083

 
—

 
—

 
(10,071
)
 
—

 
13,012

Professional fees
 
3,914

 
—

 
—

 
(924
)
 
—

 
2,990

Change in future policy benefits
 
2,197

 
—

 
—

 
(2,197
)
 
—

 
—

Mortality expenses
 
5,225

 
—

 
—

 
(5,225
)
 
—

 
—

Commission expense
 
1,158

 
—

 
—

 
(1,158
)
 
—

 
—

Depreciation and amortization expenses
 
3,366

 
1,704

 
—

 
(1,740
)
 
—

 
3,330

Other expenses
 
10,057

 
—

 
—

 
(5,042
)
 
—

 
5,015

Total expenses
 
61,221

 
1,704

 
—

 
(32,167
)
 
(954
)
 
29,804

Results of consolidated CLOs:
 
 
 
 
 
 
 
 
 
 
 
 
Income attributable to consolidated CLOs
 
24,835

 
—

 
7,863

 
—

 
—

 
32,698

Expenses attributable to consolidated CLOs
 
28,989

 
—

 
(8,005
)
 
—

 
—

 
20,984

Net (loss) income attributable to consolidated CLOs
 
(4,154
)
 
—

 
15,868

 
—

 
—

 
11,714

(Loss) income before taxes from continuing operations
 
(5,614
)

(1,704
)

15,868


(6,134
)

—


2,416

Provision (benefit) for income taxes
 
926

 
—

 
—

 
(2,658
)
 
—

 
(1,732
)
(Loss) income from continuing operations
 
(6,540
)
 
(1,704
)
 
15,868

 
(3,476
)
 
—

 
4,148

Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
 
Income from discontinued operations, net
 
—

 
—

 
—

 
3,476

 
—

 
3,476

Discontinued operations, net
 
—

 
—

 
—

 
3,476

 
—

 
3,476

Net (loss) income before noncontrolling interest
 
(6,540
)
 
(1,704
)
 
15,868


—

 
—

 
7,624

Less: net (loss) income attributable to noncontrolling interests
 
(449
)
 


 
449

 
—

 
—

 
—

Less net (loss) income attributable to VIE subordinated noteholders
 
(8,187
)
 
—

 
8,187

 
—

 
—

 
—


Page F-14
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

For the six months ended June 30, 2014
 
 
As previously filed
 
Out of period adjustments
 
ASU 2014-13 adoption
 
Discontinued operations
 
Reclassifications (1)
 
As adjusted
Less: net (loss) income attributable to noncontrolling interests - Tiptree Financial Partners, L.P.
 
—

 
(1,016
)
 
5,567

 
—

 
—

 
4,551

Less: net (loss) income attributable to noncontrolling interests - Other
 
—

 
(340
)
 
(252
)
 
—

 
—

 
(592
)
Net income available to common stockholders
 
$
2,096


$
(348
)

$
1,917


$
—


$
—


$
3,665

 
 
 
 
 
 
 
 
 
 
 
 
 
Basic, continuing operations, net
 
$
0.20

 
$
(0.03
)
 
$
0.18

 
$
(0.08
)
 
$
—

 
$
0.27

Basic, discontinued operations, net
 
—

 
—

 
—

 
0.08

 
—

 
0.08

Net income basic
 
$
0.20

 
$
(0.03
)
 
$
0.18

 
$
—

 
$
—

 
$
0.35

 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted, continuing operations, net
 
$
0.20

 
$
(0.03
)
 
$
0.18

 
$
(0.08
)
 
$
—

 
$
0.27

Diluted, discontinued operations, net
 
—

 
—

 
—

 
0.08

 
—

 
0.08

Net income, diluted
 
$
0.20

 
$
(0.03
)
 
$
0.18

 
$
—

 
$
—

 
$
0.35


Notes:
(1)    Prior period information reclassified to conform to the current year presentation.
 
 
 
 
 
 
 
 
 
 
 
 
 
 

(4) Business Acquisitions

In accordance with ASC Topic 805, Business Combinations, the Company accounts for acquisitions by applying the acquisition method of accounting. The acquisition method requires, among other things, that the assets acquired and liabilities assumed in a business combination be measured at fair value as of the closing date of the acquisition.
In December 2014, the Company completed the acquisition of Fortegra, and paid $211,740 for 100% ownership. Fortegra’s products include payment protection products, motor club memberships, service contracts, device and warranty services, as well as administration services to business partners, including insurance companies, retailers, dealers, insurance brokers and agents and financial services companies. The primary reason for the Company’s acquisition of Fortegra is to expand its insurance and insurance services operations.

Fortegra’s results are included in the Company’s insurance and insurance services segment. The Company did not issue shares of its common stock in connection with the acquisition of Fortegra.

Recording of the Preliminary Value of Assets Acquired and Liabilities Assumed

The consideration for the acquisition of Fortegra was funded through the Company’s cash on hand of $91,740 and borrowings of $120,000. The purchase price of Fortegra was largely determined on the basis of management’s expectations of future earnings and cash flows, resulting in the recognition of goodwill. The preliminary purchase price allocation below has been developed based on preliminary estimates of and subsequent adjustments to fair value using the historical financial statements of Fortegra as of the acquisition date. In addition, the allocation of the purchase price to intangible assets is based on preliminary fair value estimates and subject to the completion of management’s final analysis.

Management’s preliminary allocation of the purchase price to the net assets acquired resulted in the recording of intangible assets. Because valuations of acquired assets and liabilities are still in process, information may become available within the measurement period, which may or may not change these valuations and, accordingly, the purchase price allocation is subject to adjustment. The residual amount of the purchase price after preliminary allocation to net assets acquired and identifiable intangibles has been allocated to goodwill. This goodwill is included in the insurance and insurance services segment.

During 2015, the Company received the preliminary valuation study prepared by an external valuation expert for identifiable intangible assets and goodwill for the 2014 acquisition of Fortegra. Accordingly, the consolidated balance sheet at December 31, 2014, has been retrospectively adjusted to include the effect of the measurement period adjustments as required under ASC Topic 805 for the Fortegra purchase. Adjustments were recorded to the values of intangible assets and goodwill based upon

Page F-15
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

completion of valuation models in the studies and the refinement of assumptions supporting those models as presented in the valuation studies.

Using this preliminary valuation study, during 2015, the Company decreased the balance of goodwill as of December 4, 2014 by $3,229 and increased other intangibles assets by $500 with corresponding decreases of $6,270 to other liabilities and accrued expenses and $105 to non-controlling interests, as shown in the table below. See Note 12—Identifiable Intangible Assets and Goodwill, for more information on the retrospective measurement period adjustments made in 2015 to Fortegra’s December 4, 2014 balances. The Fortegra acquisition determinations are preliminary, mainly due to ongoing review of the preliminary studies.

The following table presents the preliminary determination of the fair value amounts for the identifiable assets acquired, liabilities assumed, and goodwill recorded as of the acquisition date of Fortegra including the effects of the retrospective measurement period adjustments recorded in 2015, as discussed above:
 
December 4, 2014
 
Preliminary Fair Values
 
As adjusted
Assets:
 
Cash and cash equivalents – unrestricted
$
24,906

Cash and cash equivalents – restricted
6,693

Investments in available for sale securities, at fair value
166,839

Notes receivable, net
17,775

Accounts and premiums receivable, net
40,762

Reinsurance receivables
258,179

Other assets
51,192

Intangible assets
115,000

Liabilities:
 
Debt
43,548

Unearned premiums
290,029

Policy liabilities
63,435

Deferred revenue
39,122

Deferred tax liability
38,208

Other liabilities and accrued expenses (1)
79,227

Net assets acquired
127,777

Non-controlling interests
(6,250
)
Goodwill
90,213

 
$
211,740

Consideration:
 
Cash
$
91,740

Debt
120,000

Total consideration paid
$
211,740

(1) Includes $809 of unsettled liabilities associated with Fortegra’s previous discontinued operations, which is included as a component of liabilities held for sale and discontinued operations within the Company’s consolidated balance sheet.

Non-Tax Deductible Goodwill Associated with the Fortegra Acquisition
The acquisition of Fortegra is being treated as a stock purchase for tax purposes and any goodwill and identified intangible assets recorded by the Company in connection with the acquisition will not be deductible for tax purposes.

(5) Dispositions, Assets Held for Sale and Discontinued Operations

On June 30, 2015, the Company completed the previously announced sale of its PFG subsidiary. The Company received total cash of $142,837 and will receive two future payments over the next two years totaling approximately $7,341. The gain on the sale net of tax, was approximately $16,349, which is classified as a gain on sale from discontinued operations.


Page F-16
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

The Company has reclassified the income and expenses attributable to PFG to income from discontinued operations, net for the three months and six months ended June 30, 2015 and June 30, 2014. See Note 2—Summary of Significant Accounting Policies, for more information.
 
 
 
 
The following table represents detail of revenues and expenses of discontinued operations in the consolidated statements of operations for the periods presented:
 
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Net realized gain on investments
$
131

 
$
9

 
$
151

 
$
14

Interest income
1,041

 
1,145

 
2,215

 
2,333

Separate account fees
6,480

 
5,525

 
12,706

 
11,012

Administrative service fees
12,726

 
12,589

 
25,385

 
24,941

Other income
—

 
—

 
2

 
1

Total Revenues
20,378

 
19,268

 
40,459

 
38,301

Expenses:
 
 
 
 
 
 
 
Interest expense
2,572

 
2,896

 
5,226

 
5,810

Payroll expense
4,474

 
4,788

 
9,086

 
10,071

Professional fees
1,758

 
734

 
2,077

 
924

Change in future policy benefits
4,586

 
1,072

 
5,688

 
2,197

Mortality expenses
(1,082
)
 
2,583

 
1,723

 
5,225

Commission expense
(38
)
 
584

 
770

 
1,158

Depreciation and amortization expenses
404

 
937

 
862

 
1,740

Other expenses
1,996

 
1,911

 
4,232

 
5,042

Total expenses
14,670

 
15,505

 
29,664

 
32,167

Less: Provision for income taxes
1,054

 
1,577

 
3,796

 
2,658

Income from discontinued operations, net
$
4,654

 
$
2,186

 
$
6,999

 
$
3,476

See Note 17—Fair Value of Financial Instruments, for information regarding the leveling of assets and liabilities held for sale.
The following table presents the cash flows from discontinued operations for the periods indicated:

 
Six months ended June 30,
 
2015
 
2014
Net cash (used in)/provided by:
 
 
 
Operating activities
$
(6,198
)
 
$
(3,633
)
Investing activities
11,866

 
8,423

Financing activities
(5,000
)
 
(3,000
)
Net cash flows
$
668

 
$
1,790


As of June 30, 2015 and December 31, 2014, the Company has $771 and $809, respectively, included on the consolidated balance sheets as liabilities from discontinued operations associated with Fortegra’s dispositions as of December 31, 2013.

(6) Operating Segment Data

During 2014, management changed its reportable operating segments. The Company now has five reportable operating segments. The Company’s five operating segments are: insurance and insurance services, specialty finance, real estate, asset management and its corporate and other segment. The Company’s operating segments are organized in a manner that reflects how management views these strategic business units.

Each reportable segment’s profit/(loss) is reported before income taxes, discontinued operations and non-controlling interests.

Descriptions of each of the reportable segments are as follows:

Page F-17
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)


Insurance and Insurance Services operations are conducted through Fortegra, a wholly owned subsidiary acquired by the Company on December 4, 2014. Fortegra is a specialized insurance company that offers a wide array of consumer related protection products, including credit-related insurance, mobile device protection, and warranty and service contracts. Fortegra also provides third party administration services to insurance companies, retailers, automobile dealers, insurance brokers and agents and financial services companies.
For insurance and insurance services, the main drivers of revenue are earned premiums, net and service and administrative fees.
Specialty Finance is comprised of Siena Capital Finance LLC (Siena), which commenced operations in April 2013, and Luxury, which was acquired in January 2014. Segment results incorporate the revenues and expenses of these subsidiaries since they commenced operations or were acquired.
Siena’s business consists of structuring asset-based loan facilities across diversified industries which include manufacturing, distribution, wholesale, and service companies. Luxury is a residential mortgage lender that originates loans, primarily FHA, prime jumbo and super jumbo mortgages for sale to institutional investors.
For specialty finance, the main drivers of revenue are gain on the sale of loans held for sale, net, loan fees earned and investment interest.
Real Estate operations include Care LLC, a wholly-owned subsidiary of Tiptree which has a geographically diverse portfolio of seniors housing properties including assisted-living, independent-living, memory care and skilled nursing in the U.S.
Revenue for this segment is largely derived from rental revenue and investment interest.
Asset Management operations is primarily comprised of Telos Asset Management’s (TLAM) management of CLOs and Muni Capital Management’s (MCM) management of Non-Profit Preferred Funding Trust I (NPPF I). Both TLAM and MCM are subsidiaries of Tiptree Asset Management Company, LLC (TAMCO), an SEC-registered investment advisor owned by the Company. NPPF I is a structured tax-exempt pass-through entity that holds tax-exempt bonds for the benefit of unaffiliated investors.
The asset management segment generates fee income from the CLOs under management and from its management of NPPF I.
Corporate and other operations include Tiptree Direct Holdings LLC (Tiptree Direct) and Muni Funding Company of America LLC (MFCA). Tiptree Direct holds the Company’s principal investments, which consist of CLO subordinated notes, risk mitigation transactions, warehouse holdings, holdings in the Star Asia Finance, Limited, Star Asia Opportunity, LLC and Star Asia Opportunity II-LLC (Star Asia Entities) and other corporate investments. MFCA is a specialty finance company that owns and manages a portfolio of non-investment grade and non-rated direct and indirect debt obligations of middle-market tax-exempt borrowers.
For corporate and other, the main drivers of revenue include investment interest, net realized and unrealized gains on investments, distributions earned on the CLO subordinated notes and related participations in management fees held by the Company and realized and unrealized gains and losses on such debt and positions.
Intersegment revenues/expenses refers to those items of revenue/expense which are eliminated upon consolidation. Intersegment revenue and expense between the specialty finance segment and corporate and other segment largely relate to interest paid and received on subordinated debt and related participations in management fees. Management made estimates to allocate a proportionate share of MCM’s expenses to the asset management segment relating to its management of NPPF I. The remaining expenses not allocated are related to MFCA and have been allocated to the corporate and other segment.

Page F-18
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

The tables below present the components of revenue, expense, profit or loss, and segment assets for each of the operating segments for the following periods:
 
Three months ended June 30, 2015
 
Insurance and insurance services
 
Specialty finance
 
Real estate
 
Asset management
 
Corporate and other
 
Totals
Net realized and unrealized gains (losses) on investments
$
5

 
$
(195
)
 
$
369

 
$
—

 
$
264

 
$
443

Net realized and unrealized gains on mortgage pipeline and associated hedging instruments
—

 
368

 
—

 
—

 
—

 
368

Interest income
687

 
1,822

 
25

 
—

 
333

 
2,867

Service and administrative fees
25,545

 
—

 
—

 
—

 
—

 
25,545

Ceding commissions
10,148

 
—

 
—

 
—

 
—

 
10,148

Earned premiums, net
39,707

 
—

 
—

 
—

 
—

 
39,707

Gain on sale of loans held for sale, net
—

 
4,005

 
—

 
—

 
—

 
4,005

Loan fee income
—

 
1,882

 
—

 
—

 
—

 
1,882

Rental revenue
—

 
7

 
11,184

 
—

 
—

 
11,191

Other income
2,429

 
91

 
772

 
38

 
(307
)
 
3,023

Total revenue
78,521

 
7,980

 
12,350

 
38

 
290

 
99,179

 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
1,775

 
834

 
1,810

 
—

 
1,775

 
6,194

Payroll and employee commissions
9,678

 
4,520

 
4,129

 
264

 
4,838

 
23,429

Commission expense
23,927

 
—

 
—

 
—

 
—

 
23,927

Member benefit claims
8,240

 
—

 
—

 
—

 
—

 
8,240

Net losses and loss adjustment expenses
12,926

 
—

 
—

 
—

 
—

 
12,926

Depreciation and amortization expenses
7,258

 
124

 
3,945

 
—

 
32

 
11,359

Other expenses
8,417

 
1,934

 
4,435

 
175

 
1,639

 
16,600

Total expense
72,221

 
7,412

 
14,319

 
439

 
8,284

 
102,675

Net income attributable to consolidated CLOs
—

 
—

 
—

 
2,752

 
(836
)
 
1,916

Pre-tax income (loss)
$
6,300

 
$
568

 
$
(1,969
)
 
$
2,351

 
$
(8,830
)
 
$
(1,580
)
Less: Provision (benefit) for income taxes
 
 
 
 
 
 
 
 
 
 
(371
)
Discontinued operations
 
 
 
 
 
 
 
 
 
 
21,003

Net income before non-controlling interests
 
 
 
 
 
 
 
 
 
 
$
19,794

Less: net income attributable to noncontrolling interests from continuing operations and discontinued operations - Tiptree Financial Partners, L.P.
 
 
 
 
 
 
 
 
 
 
4,735

Less: net income attributable to noncontrolling interests from continuing operations and discontinued operations - Other
 
 
 
 
 
 
 
 
 
 
97

Net income available to common stockholders
 
 
 
 
 
 
 
 
 
 
$
14,962



Page F-19
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

 
Three months ended June 30, 2014
 
Insurance and insurance services
 
Specialty finance
 
Real estate
 
Asset management
 
Corporate and other
 
Totals
Net realized and unrealized gains (losses) on investments
$
—

 
$
148

 
$
(415
)
 
$
—

 
$
238

 
$
(29
)
Net realized and unrealized gains on mortgage pipeline and associated hedging instruments
—

 
105

 
—

 
—

 
—

 
105

Interest income
—

 
766

 
682

 
—

 
1,736

 
3,184

Gain on sale of loans held for sale, net
—

 
1,759

 
—

 
—

 
—

 
1,759

Loan fee income
—

 
980

 
—

 
—

 
—

 
980

Rental revenue
—

 
7

 
4,376

 
—

 
—

 
4,383

Other income
—

 
91

 
192

 
64

 
(1,089
)
 
(742
)
Total revenue
—

 
3,856

 
4,835

 
64

 
885

 
9,640

 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
—

 
311

 
978

 
—

 
1,354

 
2,643

Payroll and employee commissions
—

 
2,799

 
1,716

 
324

 
2,458

 
7,297

Depreciation and amortization expenses
—

 
127

 
1,535

 
—

 
—

 
1,662

Other expenses
—

 
1,240

 
1,357

 
173

 
1,583

 
4,353

Total expense
—

 
4,477

 
5,586

 
497

 
5,395

 
15,955

Net intersegment revenue/(expense)
—

 
(110
)
 
—

 
—

 
110

 
—

Net income attributable to consolidated CLOs
—

 
—

 
—

 
3,010

 
4,061

 
7,071

Pre-tax income (loss)
$
—

 
$
(731
)
 
$
(751
)
 
$
2,577

 
$
(339
)
 
$
756

Less: Provision (benefit) for income taxes
 
 
 
 
 
 
 
 
 
 
(1,080
)
Discontinued operations
 
 
 
 
 
 
 
 
 
 
2,186

Net income before non-controlling interests
 
 
 
 
 
 
 
 
 
 
$
4,022

Less: net income attributable to noncontrolling interests from continuing operations and discontinued operations - Tiptree Financial Partners, L.P.
 
 
 
 
 
 
 
 
 
 
2,245

Less: net (loss) attributable to noncontrolling interests from continuing operations and discontinued operations - Other
 
 
 
 
 
 
 
 
 
 
(262
)
Net income available to common stockholders
 
 
 
 
 
 
 
 
 
 
$
2,039


Page F-20
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)


 
Six months ended June 30, 2015
 
Insurance and insurance services
 
Specialty finance
 
Real estate
 
Asset management
 
Corporate and other
 
Totals
Net realized and unrealized gains (losses) on investments
$
—

 
$
307

 
$
(116
)
 
$
—

 
$
31

 
$
222

Net realized and unrealized gains on mortgage pipeline and associated hedging instruments
—

 
719

 
—

 
—

 
—

 
719

Interest income
1,399

 
3,175

 
44

 
—

 
545

 
5,163

Service and administrative fees
47,472

 
—

 
—

 
—

 
—

 
47,472

Ceding commissions
20,085

 
—

 
—

 
—

 
—

 
20,085

Earned premiums, net
77,060

 
—

 
—

 
—

 
—

 
77,060

Gain on sale of loans held for sale, net
—

 
6,598

 
—

 
—

 
—

 
6,598

Loan fee income
—

 
3,281

 
—

 
—

 
—

 
3,281

Rental revenue
—

 
24

 
20,536

 
—

 
—

 
20,560

Other income
4,884

 
131

 
1,310

 
101

 
(397
)
 
6,029

Total revenue
150,900

 
14,235

 
21,774

 
101

 
179

 
187,189

 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
3,514

 
1,345

 
3,140

 
—

 
3,324

 
11,323

Payroll and employee commissions
20,083

 
8,244

 
8,052

 
812

 
6,579

 
43,770

Commission expense
40,455

 
—

 
—

 
—

 
—

 
40,455

Member benefit claims
15,819

 
—

 
—

 
—

 
—

 
15,819

Net losses and loss adjustment expenses
25,376

 
—

 
—

 
—

 
—

 
25,376

Depreciation and amortization expenses
19,212

 
246

 
7,333

 
—

 
32

 
26,823

Other expenses
16,115

 
3,397

 
9,399

 
337

 
4,473

 
33,721

Total expense
140,574

 
13,232

 
27,924

 
1,149

 
14,408

 
197,287

Net income attributable to consolidated CLOs
—

 
—

 
—

 
5,573

 
(2,915
)
 
2,658

Pre-tax income (loss)
$
10,326

 
$
1,003

 
$
(6,150
)
 
$
4,525

 
$
(17,144
)
 
$
(7,440
)
Less: Provision (benefit) for income taxes
 
 
 
 
 
 
 
 
 
 
(1,867
)
Discontinued operations
 
 
 
 
 
 
 
 
 
 
23,348

Net income before non-controlling interests
 
 
 
 
 
 
 
 
 
 
$
17,775

Less: net income attributable to noncontrolling interests from continuing operations and discontinued operations - Tiptree Financial Partners, L.P.
 
 
 
 
 
 
 
 
 
 
3,875

Less: net (loss) attributable to noncontrolling interests from continuing operations and discontinued operations - Other
 
 
 
 
 
 
 
 
 
 
(83
)
Net income available to common stockholders
 
 
 
 
 
 
 
 
 
 
$
13,983

 
 
 
 
 
 
 
 
 
 
 
 
Segment Assets as of June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Segment assets
$
840,262

 
$
123,636

 
$
240,247

 
$
2,782

 
$
282,186

 
$
1,489,113

Assets of consolidated CLOs
 
 
 
 
 
 
 
 
 
 
1,883,030

Assets held for sale
 
 
 
 
 
 
 
 
 
 
—

Total assets
 
 
 
 
 
 
 
 
 
 
$
3,372,143


Page F-21
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)


 
Six months ended June 30, 2014
 
Insurance and insurance services
 
Specialty finance
 
Real estate
 
Asset management
 
Corporate and other
 
Totals
Net realized and unrealized gains (losses) on investments
$
—

 
$
115

 
$
(724
)
 
$
—

 
$
1,484

 
$
875

Net realized and unrealized gains on mortgage pipeline and associated hedging instruments
—

 
190

 
—

 
—

 
—

 
190

Interest income
—

 
1,220

 
1,365

 
—

 
4,591

 
7,176

Gain on sale of loans held for sale, net
—

 
2,734

 
—

 
—

 
—

 
2,734

Loan fee income
—

 
1,409

 
—

 
—

 
—

 
1,409

Rental revenue
—

 
17

 
8,822

 
—

 
—

 
8,839

Other income
—

 
92

 
386

 
158

 
(1,353
)
 
(717
)
Total revenue
—

 
5,777

 
9,849

 
158

 
4,722

 
20,506

 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
—

 
455

 
1,956

 
—

 
3,046

 
5,457

Payroll and employee commissions
—

 
4,392

 
3,514

 
1,030

 
4,076

 
13,012

Depreciation and amortization expenses
—

 
237

 
3,093

 
—

 
—

 
3,330

Other expenses
—

 
1,972

 
2,801

 
363

 
2,869

 
8,005

Total expense
—

 
7,056

 
11,364

 
1,393

 
9,991

 
29,804

Net intersegment revenue/(expense)
—

 
(188
)
 
—

 
—

 
188

 
—

Net income attributable to consolidated CLOs
—

 
—

 
—

 
6,131

 
5,583

 
11,714

Pre-tax income (loss)
$
—

 
(1,467
)
 
(1,515
)
 
4,896

 
502


2,416

Less: Provision for income taxes


 


 


 


 


 
(1,732
)
Discontinued operations


 


 


 


 


 
3,476

Net income before non-controlling interests


 


 


 


 


 
$
7,624

Less: net (loss) attributable to noncontrolling interests from continuing operations and discontinued operations - Tiptree Financial Partners, L.P.
 
 
 
 
 
 
 
 
 
 
4,551

Less: net income attributable to noncontrolling interests from continuing operations and discontinued operations - Other


 


 


 


 


 
(592
)
Net income available to common stockholders
 
 
 
 
 
 
 
 
 
 
$
3,665

 
 
 
 
 
 
 
 
 
 
 
 
Segment Assets as of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Segment assets
$
767,914

 
$
79,075

 
$
179,822

 
$
2,871

 
$
65,570

 
$
1,095,252

Assets of consolidated CLOs
 
 
 
 
 
 
 
 
 
 
1,978,094

Assets held for sale
 
 
 
 
 
 
 
 
 
 
5,129,745

Total assets
 
 
 
 
 
 
 
 
 
 
$
8,203,091


(7) Investments in Available for Sale Securities

All of the Company’s investments in available for sale securities as of June 30, 2015 and December 31, 2014 are held by Fortegra. Investments in available for sale securities held by PFG as of December 31, 2014 have been transferred into assets held for sale. The following tables present the Company's investments in available for sale securities:

Page F-22
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

 
As of June 30, 2015
 
Amortized
cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
62,083

 
$
74

 
$
(262
)
 
$
61,895

Municipal securities
39,977

 
28

 
(230
)
 
39,775

Corporate securities
67,999

 
61

 
(366
)
 
67,694

Certificates of deposit
891

 
—

 
—

 
891

Equity securities
7,082

 
3

 
(199
)
 
6,886

Obligations of foreign governments
2,651

 
2

 
(22
)
 
2,631

Total
$
180,683

 
$
168

 
$
(1,079
)
 
$
179,772

 
 
 
 
 
 
 
 
 
As of December 31, 2014
 
Amortized
cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
58,319

 
$
28

 
$
(108
)
 
$
58,239

Municipal securities
35,920

 
45

 
(93
)
 
35,872

Corporate securities
67,795

 
28

 
(347
)
 
67,476

Certificates of deposit
871

 
—

 
—

 
871

Equity securities
7,138

 
8

 
(96
)
 
7,050

Obligations of foreign governments
1,636

 
—

 
(16
)
 
1,620

Total
$
171,679

 
$
109

 
$
(660
)
 
$
171,128

The following tables summarize the gross unrealized losses on available for sale securities in an unrealized loss position:
 
As of June 30, 2015
 
Less Than or Equal to One Year
 
More Than One Year
 
Fair value
 
Gross
unrealized losses
 
# of Securities
 
Fair value
 
Gross unrealized losses
 
# of Securities
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
36,187

 
$
(262
)
 
70

 
$
—

 
$
—

 
—

Municipal securities
32,110

 
(230
)
 
69

 
—

 
—

 
—

Corporate securities
47,474

 
(366
)
 
111

 
—

 
—

 
—

Equity securities
5,857

 
(199
)
 
12

 
—

 
—

 
—

Obligations of foreign governments
2,066

 
(22
)
 
2

 
—

 
—

 
—

Total
$
123,694

 
$
(1,079
)
 
264

 
$
—

 
$
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2014
 
Less Than or Equal to One Year
 
More Than One Year
 
Fair value
 
Gross
unrealized losses
 
# of Securities
 
Fair value
 
Gross unrealized losses
 
# of Securities
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
38,972

 
$
(108
)
 
151

 
$
—

 
$
—

 
—

Municipal securities
25,611

 
(93
)
 
58

 
—

 
—

 
—

Corporate securities
59,013

 
(347
)
 
280

 
—

 
—

 
—

Equity securities
5,443

 
(96
)
 
18

 
—

 
—

 
—

Obligations of foreign governments
1,620

 
(16
)
 
5

 
—

 
—

 
—

Total
$
130,659

 
$
(660
)
 
512

 
$
—

 
$
—

 
—

The Company does not intend to sell the investments that were in an unrealized loss position at June 30, 2015, and management believes that it is more likely than not that the Company will be able to hold these securities until full recovery of their amortized

Page F-23
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

cost basis for fixed maturity securities or cost for equity securities. The unrealized losses were attributable to changes in interest rates and not credit-related issues. As of June 30, 2015, based on the Company's review, none of the fixed maturity or equity securities were deemed to be other-than-temporarily impaired based on the Company's analysis of the securities and its intent to hold the securities until recovery. There have been no other-than-temporary impairments recorded by the Company for the three and six months ended June 30, 2015.

The amortized cost and fair values of investments in debt securities, by contractual maturity date, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Excluded from this table are equity securities since they have no contractual maturity as well as certificates of deposit, which have maturities of less than one year.
 
As of June 30, 2015
 
As of December 31, 2014
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
$
16,121

 
$
16,118

 
$
14,239

 
$
14,230

Due after one year through five years
79,655

 
79,589

 
73,476

 
73,176

Due after five years through ten years
50,299

 
49,824

 
54,325

 
54,151

Due after ten years
26,635

 
26,464

 
21,630

 
21,650

Total
$
172,710

 
$
171,995

 
$
163,670

 
$
163,207

Purchases of available for sale securities were $14,907 and $28,373 for the three and six months ended June 30, 2015, respectively. Proceeds from maturities calls and prepayments of available for sale securities were $8,235 and $16,405 for the three and six months ended June 30, 2015, respectively. Proceeds from the sale of available for sale securities for the three and six months ended June 30, 2015, were $1,011 and $1,733 with associated gains of $5 and losses of $0, respectively.

(8) Loans Owned

The following table presents the Company’s loan portfolio, measured at amortized costs:
 
As of
 
June 30, 2015
 
December 31, 2014
Asset backed
$
50,739

 
$
35,395

Other loans
700

 
700

Total loans, net
$
51,439

 
$
36,095

Total loans owned include net deferred loan origination fees of $3,079 and $2,308 at June 30, 2015 and December 31, 2014, respectively. Asset backed loans are presented net of an allowance for loan losses of $330 and $189 at June 30, 2015 and December 31, 2014, respectively.
Asset backed - Siena
Siena structures asset-based loan facilities in the $1,000 to $25,000 range across diversified industries, which include manufacturing distribution, wholesale, and service companies. As of June 30, 2015, the Company carried $50,739 in loans receivable on its consolidated balance sheet, which is net of a participation interest of $21,028. Collateral for asset-backed loan receivables, as of June 30, 2015 consisted of inventory, equipment and accounts receivable. Management reviews collateral for these loans on at least a monthly basis or more frequently if a draw is requested and as such has determined that no impairment existed as of June 30, 2015. As of June 30, 2015, there were no delinquencies in the Siena portfolio and all loans were classified as performing.
Other loans
Care, through indirect subsidiaries of Care, made a loan to the lessees of one of its properties. The loan is secured by a pledge of outstanding equity interests in the lessees. The cost basis of the loan at June 30, 2015 was approximately $700, which equals its carrying value.


Page F-24
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

(9) Notes Receivable

Calamar Properties

Care owns a 75% interest in Care Cal JV LLC, which through two subsidiaries, owns what are referred to as the Calamar Properties. Affiliates of Calamar Enterprises, Inc. (Calamar) own a 25% interest in Care Cal JV LLC. In connection therewith, a subsidiary of Care Cal JV LLC issued notes to affiliates of Calamar. The cost basis of the notes at June 30, 2015 and December 31, 2014 was approximately $3,865 and $3,865, respectively. As of June 30, 2015 all of these notes were performing.
Fortegra
As of June 30, 2015, Fortegra held $17,782 in notes receivable, net. The majority of these notes totaling $11,822 consist of receivables from Fortegra’s premium financing program. A total of $2,381 was for notes receivable under its Pay us Later Program, which allows customers to finance the cost of electronic mobile devices and or protection programs on these devices. The remaining $3,579 represents unsecured notes receivable issued to various business partners in order to solidify relationships and grow its business. The Company has established a valuation allowance against its notes receivable of $292 as of June 30, 2015. As of June 30, 2015, there were $737 in balances classified as 90 days plus past due.

(10) Reinsurance

The following table presents the effect of reinsurance on premiums written and earned by Fortegra for the following period:
Premiums
Three months ended June 30, 2015
 
Six months ended June 30, 2015
 
Written
Earned
 
Written
Earned
Direct and assumed
$
167,087

$
140,582

 
$
311,371

$
277,636

Ceded
(120,832
)
(100,875
)
 
(233,173
)
(200,576
)
Net
$
46,255

$
39,707

 
$
78,198

$
77,060


The following table presents the effect of reinsurance on losses and loss adjustment expenses ("LAE") incurred by Fortegra for the following period:
Losses and LAE incurred
Three months ended June 30, 2015
 
Six months ended June 30, 2015
Direct and assumed
$
41,884

 
$
80,042

Ceded
(28,958
)
 
(54,666
)
    Net losses & LAE incurred
$
12,926

 
$
25,376


The following table presents the components of the reinsurance receivables:
 
As of
 
June 30, 2015
 
December 31, 2014
Prepaid reinsurance premiums:
 
 
 
Life (1)
$
57,116

 
$
52,574

Accident and health (1)
48,873

 
44,968

Property
149,832

 
126,669

Total
255,821

 
224,211

Ceded claim reserves:
 
 
 
Life
2,485

 
1,868

Accident and health
8,061

 
7,971

Property
23,583

 
18,325

Total ceded claim reserves recoverable
34,129

 
28,164

Other reinsurance settlements recoverable
10,115

 
12,401

Reinsurance receivables
$
300,065

 
$
264,776


(1) Including policyholder account balances ceded.


Page F-25
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

The following table presents the aggregate amount included in reinsurance receivables that is comprised of the three largest receivable balances from unrelated reinsurers:
 
As of
 
June 30, 2015
Total of the three largest receivable balances from unrelated reinsurers
$
150,635


At June 30, 2015, the three unrelated reinsurers from whom Fortegra has the largest receivable balances were: London Life Reinsurance Company (A. M. Best Rating: A); London Life International Reinsurance Corporation (A. M. Best Rating: not rated); and MFI Insurance Company, LTD (A. M. Best Rating: Not rated). The related receivables of London Life International Reinsurance Corporation are collateralized by assets held in trust accounts and letters of credit due to their offshore relationships. At June 30, 2015, the Company does not believe there is a risk of loss as a result of the concentration of credit risk in the reinsurance program.

(11) Real Estate

The following table contains information regarding the Company’s investment in real estate as of the following periods:
 
June 30, 2015
 
Land
 
Buildings
 
Accumulated depreciation
 
Total
Greenfield Portfolio - Triple net lease
$
5,600

 
$
14,220

 
$
(1,520
)
 
$
18,300

Calamar Properties - JV
840

 
22,243

 
(1,464
)
 
21,619

Terraces Portfolio - Triple net lease
803

 
20,123

 
(1,060
)
 
19,866

Heritage Portfolio - JV
3,605

 
39,713

 
(1,617
)
 
41,701

Greenfield Portfolio - JV
2,690

 
25,990

 
(612
)
 
28,068

Royal Portfolio - JV
2,770

 
24,400

 
(324
)
 
26,846

Greenfield II Portfolio - Triple net lease
4,800

 
46,388

 
(340
)
 
50,848

Other real estate owned (1)
—

 
1,675

 
(358
)
 
1,317

Total
$
21,108

 
$
194,752

 
$
(7,295
)
 
$
208,565

 
 
 
 
 
 
 
 
 
December 31, 2014
 
Land
 
Buildings
 
Accumulated depreciation
 
Total
Greenfield Portfolio - Triple net lease
$
5,600

 
$
14,220

 
$
(1,319
)
 
$
18,501

Calamar Properties - JV
840

 
22,230

 
(1,161
)
 
21,909

Terraces Portfolio - Triple net lease
803

 
20,123

 
(778
)
 
20,148

Heritage Portfolio - JV
3,605

 
39,535

 
(1,055
)
 
42,085

Greenfield Portfolio - JV
2,690

 
24,827

 
(198
)
 
27,319

Other real estate owned (1)
—

 
1,675

 
(329
)
 
1,346

Total
$
13,538

 
$
122,610

 
$
(4,840
)
 
$
131,308

(1) Represents a single family residential property located in Connecticut that is being rented through the Company's subsidiary, Luxury.

The following table presents the future minimum annual rental revenue under the noncancelable terms of all operating leases as of:
 
June 30, 2015
Remainder of 2015
$
3,532

2016
7,132

2017
7,232

2018
7,335

2019
7,441

Thereafter
45,383

Total
$
78,055



Page F-26
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

The schedule of minimum future rental revenue excludes residential lease agreements, generally having terms of one year or less. Rental revenue from residential leases of Care and Luxury were $9,409 and $3,420 for the three months ended June 30, 2015 and 2014, respectively. Rental revenue from residential leases of Care and Luxury were $17,720 and $6,902 for the six months ended June 30, 2015 and 2014, respectively.

2015 Acquisitions

Royal Portfolio - JV

On February 9, 2015, affiliates of Care entered into a joint venture to own and operate five seniors housing communities with affiliates of Royal. The joint venture acquired the communities for $30,052. Affiliates of Care own an 80% interest in the joint venture, while affiliates of Royal own the remaining 20% interest and they provide management services to the communities under management contracts. In connection with the acquisition, Care and Royal secured a $22,500, five year loan, (subject to a holdback) that includes 36 months of interest only payments and a $2,000 commitment, which will be available between February 9, 2016 and February 9, 2019, subject to certain conditions. For the three months ended June 30, 2015, rental revenue and net income were $2,444 and $297, respectively. For the six months ended June 30, 2015, rental revenue and the net loss were $3,890 and $1,091, respectively.

Greenfield II Portfolio - Triple net lease

On March 30, 2015, affiliates of Care acquired six seniors housing communities for $54,788. The properties are leased to affiliates of Greenfield Holdings, LLC, that operate the properties. In connection with the acquisition, Care secured a $39,500, 10 year loan (subject to a holdback), which includes 18 months of interest only payments. As of June 30, 2015 the loan had an aggregate balance of $38,700. For the three months ended June 30, 2015, rental revenue was $1,235, respectively.

2014 Acquisitions

Greenfield Portfolio - JV

On October 1, 2014, affiliates of Care entered into a joint venture to own and operate three seniors housing communities with affiliates of Greenfield. Care owns an 80% interest in the joint venture, while affiliates of Greenfield own the remaining 20% interest and provide management services to the communities under a management contract. For the three months ended June 30, 2015 rental revenue and net loss were approximately $1,943 and $548, respectively. For the six months ended June 30, 2015 rental revenue and net loss were approximately $3,735 and $1,220, respectively.
 
Heritage Portfolio - JV

On December 18, 2014, affiliates of Care entered into a joint venture to own and operate an additional seniors housing community with affiliates of Heritage. Affiliates of Care own an 80% interest in the joint venture, while affiliates of Heritage own the remaining 20% interest and continue to provide management services to the communities under a management contract. For the three months ended June 30, 2015 rental revenue and net loss from this acquisition were $1,481 and $285, respectively. For the six months ended June 30, 2015 rental revenue and net loss from this acquisition were $3,037 and $518, respectively.
 

Page F-27
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

(12) Identifiable Intangible Assets and Goodwill

The following table presents identifiable intangible assets, accumulated amortization, and goodwill by segment and includes the retrospective adjustments made to the balances at December 31, 2014, as required by ASC Topic 805, for the Fortegra acquisition:
 
As of
 
 
 
June 30, 2015
 
December 31, 2014
 
Insurance and insurance services
 
Real estate
 
Specialty Finance
 
Total
 
Insurance and insurance services
 
Real estate
 
Specialty Finance
 
Total
Customer relationships
$
50,500

 
$
—

 
$
—

 
$
50,500

 
$
50,500

 
$
—

 
$
—

 
$
50,500

Accumulated amortization
(323
)
 
—

 
—

 
(323
)
 
—

 
—

 
—

 
—

Trade names
6,500

 
—

 
—

 
6,500

 
6,500

 
—

 
—

 
6,500

Accumulated amortization
(415
)
 
—

 
—

 
(415
)
 
(55
)
 
—

 
—

 
(55
)
Software licensing
8,500

 
—

 
—

 
8,500

 
8,500

 
—

 
—

 
8,500

Accumulated amortization
(992
)
 
—

 
—

 
(992
)
 
(142
)
 
—

 
—

 
(142
)
Insurance policies and contracts acquired
36,500

 
—

 
—

 
36,500

 
36,500

 
—

 
—

 
36,500

Accumulated amortization
(20,941
)
 
—

 
—

 
(20,941
)
 
(3,956
)
 
—

 
—

 
(3,956
)
Insurance licensing agreements (1)
13,000

 
—

 
—

 
13,000

 
13,000

 
—

 
—

 
13,000

Leases in place
—

 
21,214

 
—

 
21,214

 
—

 
14,604

 
—

 
14,604

Accumulated amortization
—

 
(9,936
)
 
—

 
(9,936
)
 
—

 
(5,057
)
 
—

 
(5,057
)
Intangible assets, net
92,329

 
11,278

 
—

 
103,607

 
110,847

 
9,547

 
—

 
120,394

Goodwill (2)
90,214

 
—

 
1,904

 
92,118

 
90,214

 
—

 
1,904

 
92,118

Total
$
182,543

 
$
11,278

 
$
1,904

 
$
195,725

 
$
201,061

 
$
9,547

 
$
1,904

 
$
212,512

(1) Represents intangible assets with an indefinite useful life. Impairment tests are performed at least annually on these assets.
(2) For further information regarding goodwill associated with the Fortegra acquisition see Note 4—Business Acquisitions.
The following table presents the amortization expense on intangible assets for the next five years by relevant segment:
 
Insurance and insurance services
 
Real estate
Remainder of 2015
$
9,653

 
$
4,813

2016
11,500

 
2,643

2017
11,115

 
405

2018
9,542

 
405

2019
7,726

 
405

2020 and thereafter
29,793

 
2,607

Total
$
79,329

 
$
11,278


The following table presents the amortization expense associated with its intangibles recorded by the Company for the following periods:
 
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Amortization expense
$
9,375

 
$
926

 
$
23,397

 
$
1,852


The Company conducts annual impairment tests according to ASC Topic 350 Intangibles-Goodwill and Other. As of June 30, 2015, no impairment was recorded on either its goodwill or intangibles.


Page F-28
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

(13) Collateralized Loan Obligations (CLOs) and Consolidated Variable Interest Entities

The term CLO generally refers to a special purpose vehicle that owns a portfolio of investments and issues various tranches of debt and subordinated note securities to finance the purchase of those investments. The investment activities of a CLO are governed by extensive investment guidelines, generally contained within a CLO’s “indenture” and other governing documents which limit, among other things, the CLO’s exposure to any single industry or obligor and provide that the CLO’s assets satisfy certain ratings requirements. Most CLOs have a defined investment period during which they are allowed to make investments and reinvest capital as it becomes available.

Telos Asset Management LLC (Telos), is a CLO manager of six CLOs; namely Telos CLO 2014-6, Ltd. (Telos 6), Telos CLO 2014-5, Ltd. (Telos 5), Telos CLO 2013-4, Ltd. (Telos 4), Telos CLO 2013-3, Ltd. (Telos 3), Telos CLO 2007‑2, Ltd. (Telos 2) and Telos CLO 2006-1, Ltd. (Telos 1). Prior to the acquisition of TAMCO, the Company did not consolidate the then existing CLOs (Telos 1 and Telos 2) as it only held a residual interest which was recorded at fair value. The Company met the requirement to consolidate when it acquired the management rights of the CLOs. Tiptree owns various amounts of Telos 1, Telos 5 and Telos 6 with an aggregate fair market value of $42,741 as of June 30, 2015. Tiptree owned various amounts of Telos 1, Telos 2, Telos 4, Telos 5 and Telos 6 with an aggregate fair market value of $94,342 as of December 31, 2014. In April 2015, the Company sold all of the subordinated notes of Telos 2 held by the Company for total proceeds of $19,740. In May 2015, the Company sold all of the subordinated notes of Telos 4 held by the Company for total proceeds of $19,988.

The assets of each of the CLOs are held solely as collateral to satisfy the obligations of the CLOs. The Company does not own and has no right to the benefits from, nor does it bear the risks associated with, the assets held by the CLOs, beyond its direct investments in, and investment advisory fees generated from, the CLOs. If the Company were to liquidate, the assets of the CLOs would not be available to its general creditors, and as a result, the Company does not consider these assets available for the benefit of its investors. Additionally, the investors in the CLOs have no recourse to the Company’s general assets for the debt issued by the CLOs. Therefore, this debt is not the Company’s obligation. As of June 30, 2015 and December 31, 2014, the Company’s maximum exposure to loss related to the CLOs is limited to its investment in the CLOs of $45,041 and $97,935, respectively, as well as the management fees receivable of $2,752 and $2,782 as of June 30, 2015 and December 31, 2014, respectively. Both the carrying values of the investment in CLOs and management fees receivable are eliminated upon consolidation.
The table below represents the assets and liabilities of the consolidated CLOs that are included in the Company’s consolidated balance sheet as of the dates indicated:
 
As of
 
June 30, 2015
 
December 31, 2014
Assets:
 
 
 
Cash and cash equivalents – restricted
$
100,319

 
$
146,281

Investment in loans, at fair value
1,745,934

 
1,803,205

Investment in trading assets, at fair value
10,392

 
21,858

Due from brokers
22,229

 
2,138

Accrued interest receivable
4,145

 
4,496

Other assets
11

 
116

Total assets of consolidated CLOs
$
1,883,030

 
$
1,978,094

 
 
 
 
Liabilities:
 
 
 
Notes payable
$
1,789,223

 
$
1,785,207

Due to brokers
31,211

 
81,623

Accrued interest payable
14,202

 
10,098

Other liabilities
602

 
449

Total liabilities of consolidated CLOs
$
1,835,238

 
$
1,877,377

 
 
 
 
Net
$
47,792

 
$
100,717



Page F-29
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

The beneficial interests retained by Tiptree include (i) ownership in the subordinated notes and related participations in management fees of the CLOs and (ii) accrued management fees. Although these beneficial interests are eliminated upon consolidation, the application of the measurement alternative as prescribed by ASU 2014-13 (see Note 2) results in the net amount of the CLOs shown above to be equivalent to the beneficial interests retained by Tiptree as illustrated in the below table:
Beneficial interests:
As of
 
June 30, 2015
 
December 31, 2014
Subordinated notes
$
45,040

 
$
97,935

Accrued management fees
2,752

 
2,782

Total beneficial interests
$
47,792

 
$
100,717


The tables below provide further details regarding the CLOs notes payable amounts of $1,789,223 and $1,785,207 as of June 30, 2015 and December 31, 2014, respectively:
 
As of
 
June 30, 2015
 
December 31, 2014
Description
Aggregate
principal amount
 
Spread over three months LIBOR
 
Aggregate
principal amount
 
Spread over three months LIBOR
Telos 6 (maturity January 2027)
 
 
 
 
 
 
 
Class A-1
$
161,500

 
1.50
%
 
$
161,500

 
1.50
%
Class A-2
60,000

 
N/A

(1 
) 
60,000

 
N/A

Class B-1
8,000

 
2.10
%
 
8,000

 
2.10
%
Class B-2
34,000

 
N/A

(2 
) 
34,000

 
N/A

Class C
22,000

 
3.00
%
 
22,000

 
3.00
%
Class D
20,500

 
3.90
%
 
20,500

 
3.90
%
Class E
16,500

 
5.00
%
 
16,500

 
5.00
%
Subordinated
12,400

 
N/A

 
12,400

 
N/A

Mark to market adjustment
(8,814
)
 
 
 
(14,772
)
 
 
Telos 6 Fair Value
$
326,086

 
 
 
$
320,128

 
 
 
 
 
 
 
 
 
 
Telos 5 (maturity April 2025)
 
 
 
 
 
 
 
Class A
$
252,000

 
1.55
%
 
$
252,000

 
1.55
%
Class B-1
39,000

 
N/A

(3 
) 
39,000

 
N/A

Class B-2
7,500

 
2.15
%
 
7,500

 
2.15
%
Class C
32,750

 
3.00
%
 
32,750

 
3.00
%
Class D
19,750

 
3.65
%
 
19,750

 
3.65
%
Class E
18,000

 
5.00
%
 
18,000

 
5.00
%
Class F
7,750

 
5.50
%
 
7,750

 
5.50
%
Subordinated
10,500

 
N/A

 
10,500

 
N/A

Mark to market adjustment
(10,428
)
 
 
 
(15,078
)
 
 
Telos 5 Fair Value
$
376,822

 
 
 
$
372,172

 
 
 
 
 
 
 
 
 
 
Telos 4 (maturity July 2024)
 
 
 
 
 
 
 
Class A
$
214,000

 
1.30
%
 
$
214,000

 
1.30
%
Class B
46,500

 
1.80
%
 
46,500

 
1.80
%
Class C
29,000

 
2.75
%
 
29,000

 
2.75
%
Class D
19,250

 
3.50
%
 
19,250

 
3.50
%
Class E
16,000

 
5.00
%
 
16,000

 
5.00
%
Class X
1,050

 
0.95
%
 
1,750

 
0.95
%
Subordinated
37,000

 
N/A

 
10,700

 
N/A

Mark to market adjustment
(14,349
)
 
 
 
(14,023
)
 
 
Telos 4 Fair Value
$
348,451

 
 
 
$
323,177

 
 
 
 
 
 
 
 
 
 
Telos 3 (maturity October 2024)
 
 
 
 
 
 
 
Class A
$
225,000

 
1.42
%
 
$
225,000

 
1.42
%
Class B
36,500

 
2.25
%
 
36,500

 
2.25
%
Class C
26,500

 
3.00
%
 
26,500

 
3.00
%
Class D
18,000

 
4.25
%
 
18,000

 
4.25
%
Class E
15,000

 
5.50
%
 
15,000

 
5.50
%

Page F-30
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

 
As of
 
June 30, 2015
 
December 31, 2014
Class F
6,000

 
5.50
%
 
6,000

 
5.50
%
Subordinated
34,350

 
N/A

 
34,350

 
N/A

Mark to market adjustment
(11,705
)
 
 
 
(13,995
)
 
 
Telos 3 Fair Value
$
349,645

 
 
 
$
347,355

 
 
 
 
 
 
 
 
 
 
Telos 2 (maturity April 2022)
 
 
 
 
 
 
 
Class A-1
$
66,726

 
0.26
%
 
$
97,181

 
0.26
%
Class A-2
40,000

 
0.40
%
 
40,000

 
0.40
%
Class B
27,500

 
0.55
%
 
27,500

 
0.55
%
Class C
22,000

 
0.95
%
 
22,000

 
0.95
%
Class D
22,000

 
2.20
%
 
22,000

 
2.20
%
Class E
16,000

 
5.00
%
 
16,000

 
5.00
%
Subordinated
44,000

 
N/A

 
2,000

 
N/A

Mark to market adjustment
(15,955
)
 
 
 
(142
)
 
 
Telos 2 Fair Value
$
222,271

 
 
 
$
226,539

 
 
 
 
 
 
 
 
 
 
Telos 1 (maturity October 2021)
 
 
 
 
 
 
 
Class A-1D
$
—

 
—
%
 
$
2,927

 
0.27
%
Class A-1R
—

 
—
%
 
7,805

 
0.29
%
Class A-1T
—

 
—
%
 
10,732

 
0.27
%
Class A-2
50,797

 
0.40
%
 
60,000

 
0.40
%
Class B
27,200

 
0.49
%
 
27,200

 
0.49
%
Class C
22,000

 
0.85
%
 
22,000

 
0.85
%
Class D
22,000

 
1.70
%
 
22,000

 
1.70
%
Class E
16,000

 
4.25
%
 
16,000

 
4.25
%
Subordinated
40,223

 
N/A

 
40,223

 
N/A

Mark to market adjustment
(12,272
)
 
 
 
(13,051
)
 
 
Telos 1 Fair Value
$
165,948

 
 
 
$
195,836

 
 
 
 
 
 
 
 
 
 
Total notes payable - CLOs
$
1,789,223

 
 
 
$
1,785,207

 
 

(1)
Tranche A-2 Notes in Telos 6 have a fixed rate of 3.46% over the life of the CLO. This fixed rate exposure is partially hedged by a $60,000 interest rate swap with BNP Paribas.
(2)
Tranche B-2 Notes in Telos 6 have a fixed rate of 4.78% over the life of the CLO. This fixed rate exposure is partially hedged by a $60,000 interest rate swap with BNP Paribas.
(3)
Tranche B-1 Notes in Telos 5 have a fixed rate of 4.45% over the life of the CLO.

The following table represents revenue and expenses of the consolidated CLOs included in the Company’s consolidated statements of operations for the periods indicated:
 
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Income:
 
 
 
 
 
 
 
Net realized and unrealized losses
$
(5,670
)
 
$
(1,836
)
 
$
(14,668
)
 
$
(5,945
)
Interest income
24,703

 
19,919

 
49,364

 
38,643

Total revenue
19,033

 
18,083

 
34,696

 
32,698

Expenses:
 
 
 
 
 
 
 
Interest expense
16,506

 
10,674

 
30,751

 
20,340

Other expense
611

 
338

 
1,287

 
644

Total expense
17,117

 
11,012

 
32,038

 
20,984

 
 
 
 
 
 
 
 
Net income attributable to consolidated CLOs
$
1,916

 
$
7,071

 
$
2,658

 
$
11,714



Page F-31
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

As summarized in the table below, the application of the measurement alternative as prescribed by ASU 2014-13 (see Note 2) results in the consolidated net income summarized above to be equivalent to Tiptree’s own economic interests in the CLOs which are eliminated upon consolidation:
Economic interests:
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Distributions received and realized and unrealized gains and losses on the subordinated notes held by the Company, net
$
(836
)
 
$
4,061

 
$
(2,915
)
 
$
5,582

Management fee income
2,752

 
3,010

 
5,573

 
6,132

Total economic interests
$
1,916

 
$
7,071

 
$
2,658

 
$
11,714


(14) Derivative Financial Instruments and Hedging

The Company utilizes derivative financial instruments as part of its overall investment activities. Investments in derivative contracts are subject to additional risk that can result in a loss of all or part of an investment. The Company’s derivative activities are primarily classified by underlying credit risk, and interest rate risk. In addition, the Company is also subject to additional counterparty risk should its counterparties fail to meet the contract terms.

Derivatives, at fair value
Credit Derivatives
Credit derivatives are generally defined as over‑the‑counter contracts between a buyer and seller of protection against the risk of default on a set of obligations issued by a specified reference entity.
Credit Default Swap Indices (CDX) are credit derivatives that reference multiple names through underlying baskets or portfolios of single name credit default swaps. The Company held four CDX contracts as of June 30, 2015, with a notional amount of $595,785 ($297,612 of sold protection and $298,173 of bought protection). The Company enters into these contracts as both a buyer of protection and seller of protection to manage the credit risk exposure of its investment portfolio. The Company is required to deposit cash collateral for these positions equal to an initial 2.25% of the notional amount of the sold protection side, subject to increase based on additional maintenance margin as a result of decreases in value. As of June 30, 2015, the total margin was $6,750.
Credit Default Swaps (CDS) are generally defined as over-the-counter contracts between a buyer and seller of protection against the risk of default on a set of obligations issued by a specified reference entity. The Company is party to one CDS contract with a notional amount of $2,397 at June 30, 2015 and $2,652 as of December 31, 2014.
Credit derivatives are included as a component of trading assets, at fair value, and are shown net of any right to reclaim cash collateral or obligation to return cash collateral.
Interest Rate Lock Commitments
The Company is exposed to certain risks in connection with its mortgage banking operations at Luxury. The Company is exposed to interest rate risk for certain interest rate lock commitments (IRLCs) until a purchaser for the related underlying loans is identified. The fair value of IRLCs is subject to change primarily due to changes in market interest rates. The notional amount of the Company’s IRLCs that were matched with best efforts lock commitments with investors was $106,682 and the notional amount of the Company’s IRLCs that were matched with mandatory forward sales contracts was $7,178 as of June 30, 2015, with a combined associated fair value of $1,459. The Company hedges the mandatory forward sales contracts with TBA Mortgage Backed Security instruments. The notional amount of these open hedge instruments was $6,000 and the notional amount of the closed not yet settled hedge instruments was $3,750 as of June 30, 2015, with a combined associated fair value of $53. As of June 30, 2015, the IRLCs were included as a component of trading assets, at fair value, on the Company’s consolidated balance sheet.
Interest Rate Swaps
The Company is exposed to interest rate risk when there is an unfavorable change in the value of investments as a result of adverse movements in the market interest rates. The Company enters into interest rate swaps (IRS) to protect against such adverse movements in interest rates. The Company is required to post collateral for the benefit of the counterparty. This is included as

Page F-32
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

a component of other assets in the consolidated balance sheet.
The Company is a party to six interest rate swaps with a combined notional amount of $43,988 in order to economically hedge interest rate risk associated with its real estate portfolio. All of these swaps have the same counterparty. These swaps are included as a component of trading liabilities at fair value on the Company’s consolidated balance sheet as of June 30, 2015 and December 31, 2014. The fair value of these interest rate swaps at June 30, 2015 and December 31, 2014 were $(948) and $(833), respectively.
The following tables identify the fair value amounts of the Company’s stand-alone derivative instruments, categorized by primary underlying risk:
 
As of June 30, 2015
 
Asset Derivatives
 
Credit
risk
 
Interest rate
risk
 
Total
Credit derivatives
$
10,340

 
$
—

 
$
10,340

Interest rate lock commitments
—

 
1,459

 
1,459

TBA mortgage backed securities
—

 
53

 
53

Total
$
10,340

 
$
1,512

 
$
11,852

 
 
 
 
 
 
 
Liability Derivatives
 
Credit
risk
 
Interest rate
risk
 
Total
Interest rate swaps
$
—

 
$
2,754

 
$
2,754

Total
$
—

 
$
2,754

 
$
2,754

 
 
 
 
 
 
 
As of December 31, 2014
 
Asset Derivatives
 
Credit
risk
 
Interest rate
risk
 
Total
Credit derivatives
$
10,833

 
$
—

 
$
10,833

Interest rate lock commitments
—

 
793

 
793

Total
$
10,833


$
793


$
11,626

 
 
 
 
 
 
 
Liability Derivatives
 
Credit
risk
 
Interest rate
risk
 
Total
Interest rate swaps
$
—

 
$
2,913

 
$
2,913

Total
$
—

 
$
2,913

 
$
2,913



Page F-33
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

The following tables identify the unrealized gain/(loss) amounts, categorized by primary underlying risk, for the following periods:
Change in unrealized (depreciation)/appreciation - derivatives
 
Three months ended June 30, 2015
 
 
 
Credit
risk
 
Interest rate
risk
 
Total
 
Location in consolidated statements of operations
Credit derivatives
$
(424
)
 
$
—

 
$
(424
)
 
Net credit derivative losses
Interest rate lock commitments
—

 
291

 
291

 
Net realized and unrealized gains on investments
TBA mortgage backed securities
—

 
77

 
77

 
Net realized and unrealized gains on investments
Interest rate swaps
$
—

 
$
369

 
$
369

 
Net realized and unrealized gains on investments
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2014
 
 
 
Credit
risk
 
Interest rate
risk
 
Total
 
Location in consolidated statements of operations
Credit derivatives
$
115

 
$
—

 
$
115

 
Net credit derivative losses
Interest rate lock commitments
—

 
132

 
132

 
Net realized and unrealized gains on investments
TBA mortgage backed securities
—

 
(27
)
 
(27
)
 
Net realized and unrealized gains on investments
Interest rate swaps
$
—

 
$
(415
)
 
$
(415
)
 
Net realized and unrealized gains on investments
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2015
 
 
 
Credit
risk
 
Interest rate
risk
 
Total
 
Location in consolidated statements of operations
Credit derivatives
$
(494
)
 
$
—

 
$
(494
)
 
Net credit derivative losses
Interest rate lock commitments
—

 
572

 
572

 
Net realized and unrealized gains on investments
TBA mortgage backed securities
—

 
147

 
147

 
Net realized and unrealized gains on investments
Interest rate swaps
$
—

 
$
(116
)
 
$
(116
)
 
Net realized and unrealized gains on investments
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2014
 
 
 
Credit
risk
 
Interest rate
risk
 
Total
 
Location in consolidated statements of operations
Credit derivatives
$
123

 
$
—

 
$
123

 
Net credit derivative loss
Interest rate lock commitments
—

 
206

 
206

 
Net realized and unrealized gains on investments
TBA mortgage backed securities
—

 
(16
)
 
(16
)
 
Net realized and unrealized gains on investments
Interest rate swaps
$
—

 
$
(724
)
 
$
(724
)
 
Net realized and unrealized gains on investments

The Company nets the credit derivative assets and liabilities as these credit derivatives are subject to legally enforceable netting arrangements with the same party. There are no derivative instruments subject to a netting agreement for which we are not currently netting. The following table present derivative instruments that are subject to offset by a master netting agreement:
 
June 30, 2015
 
December 31, 2014
Derivatives subject to netting arrangements:
 
 
 
Credit default swap indices sold protection
$
45,696

 
$
52,513

Credit default swap indices bought protection
(33,811
)
 
(40,147
)
Gross assets recognized
11,885

 
12,366

Collateral payable
(1,632
)
 
(1,632
)
Net assets recognized
$
10,253

 
$
10,734


Page F-34
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

Net Credit Derivative Revenue/(Loss)
Below is a table identifying the components of the net credit derivative revenue/(loss) as shown on the Company’s consolidated statements of income for following periods:
 
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Realized/unrealized (loss)/gain
$
(424
)
 
$
(1,021
)
 
$
(494
)
 
$
(1,013
)
Premium income
3,520

 
444

 
7,248

 
444

Premium (expense)
(3,540
)
 
(680
)
 
(7,288
)
 
(952
)
Net credit derivative (loss)
$
(444
)
 
$
(1,257
)
 
$
(534
)
 
$
(1,521
)

Derivatives designated as cash flow hedging instruments

Fortegra has an interest rate swap with a counterparty pursuant to which Fortegra swapped the floating rate portion of its outstanding preferred trust securities to a fixed rate. This swap is designated as a cash flow hedge and expires in June 2017.

As of June 30, 2015, the notional amount of this instrument was $35,000, with a fair value of $(1,806), an unrealized gain net of tax of $325, a variable rate of interest of 0.29% and a fixed rate of 3.47%.

For six months ended June 30, 2015, the pretax loss recognized in accumulated other comprehensive income (AOCI) on the derivative-effective portion was $289, with a pretax loss reclassified from AOCI into income-effective portion of $564. The amount estimated to be reclassified to earnings from AOCI during the next 12 months is $1,055. These net losses reclassified into earnings are primarily expected to increase net interest expense related to the respective hedged item.


Page F-35
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

(15) Debt

The following table summarizes the balance of the Company’s debt holdings excluding notes payable of consolidated CLOs at (See Note 13—CLOs and Consolidated Variable Interest Entities, for notes payable of the consolidated CLOs):
 
As of
 
June 30, 2015
 
December 31, 2014
Operating Company:
 
 
 
Secured credit agreement
$
46,500

 
$
47,500

Original issue discount on secured credit agreement
(667
)
 
(743
)
Subtotal Operating Company
45,833

 
46,757

 
 
 
 
Siena:
 
 
 
Revolving line of credit
38,304

 
25,700

Subordinated debt
3,500

 
—

Subtotal Siena
41,804

 
25,700

 
 
 
 
Care:
 
 
 
Mortgage borrowings
166,927

 
108,229

Unamortized (discount)/premium on mortgage borrowings
48

 
36

Subtotal Care
166,975

 
108,265

 
 
 
 
Luxury:
 
 
 
Mortgage warehouse borrowing
54,050

 
27,406

Preferred notes payable
1,688

 
1,688

Mortgage borrowing
724

 
734

Subtotal Luxury
56,462

 
29,828

 
 
 
 
Fortegra:
 
 
 
Secured credit agreement- revolving credit facility
52,500

 
60,000

Secured credit agreement- term loan
47,500

 
50,000

Revolving line of credit 
7,298

 
7,649

Preferred trust securities
35,000

 
35,000

Subtotal Fortegra
142,298

 
152,649

 
 
 
 
Telos Credit Opportunities Fund, L.P.:
 
 
 
Secured credit agreement
11,000

 
—

 
 
 
 
Total debt
$
464,372

 
$
363,199

The table below presents the amount of interest expense the Company incurred on its debt for the following periods:
 
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Interest expense
$
6,091

 
$
2,133

 
$
11,054

 
$
4,545



Page F-36
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

The following table present the future maturities of the Company’s long-term debt (excluding original issue discount on credit facility, unamortized (discount)/premium on mortgage borrowings and preferred notes payable) as of:
 
June 30, 2015
Remainder of 2015
$
64,952

2016
9,920

2017
48,323

2018
50,429

2019
111,636

Thereafter
178,043

Total
$
463,303


The long-term debt of Tiptree’s subsidiaries are discussed below:

Operating Company
Senior Credit Agreement - Fortress

On September 18, 2013, Operating Company entered into a Credit Agreement with Fortress and borrowed $50,000 thereunder, with an associated original issue discount of $1,000, which is being amortized over the term of the agreement. The Credit Agreement allows Operating Company to borrow additional amounts up to a maximum aggregate of $125,000, subject to satisfaction of certain customary conditions. The obligations of Operating Company under the Credit Agreement are secured by liens on substantially all of the assets of Operating Company. The principal of, and all accrued and unpaid interest on, all loans under the Credit Agreement become immediately due and payable on September 18, 2018. Loans under the Credit Agreement bear interest at a variable rate per annum equal to one-month LIBOR (with a minimum LIBOR of 1.25%), plus a margin of 6.50% per annum. The weighted average rate paid for the six months ended June 30, 2015 was 7.75%. The principal amounts of the loan is to be repaid in quarterly installments, the amount of which may be adjusted based on the Net Leverage Ratio (as defined in the Credit Agreement) at the end of each fiscal quarter.
The Company is obligated to pay interest on a monthly basis and has incurred interest expense of $2,730 and $1,919 for six months ended June 30, 2015 and 2014, respectively. The amortization of the original issue discount totaled $643 and $843 for the six months ended June 30, 2015 and 2014, respectively.
On January 26, 2015, Tiptree entered into the Amendment to its existing Credit Agreement with Fortress providing for additional term loans in an aggregate principal amount of $25,000 to Tiptree. Tiptree was required to repay and did repay $25,000 of all the aggregate outstanding additional term loans under the Fortress credit agreement upon the closing of the PFG sale on June 30, 2015.
The Company capitalized an aggregate of approximately $1,456 of costs associated with both the original transaction and the amendment discussed in the preceding paragraph. The Company is amortizing the costs over the life of the facility. The Company recorded approximately $302 and $127 of expense for the six months ended June 30, 2015 and 2014, respectively, related to these capitalized costs.
Operating Company believes it was in compliance with all of the financial covenants contained in the Credit Agreement as of June 30, 2015.

Siena

Revolving line of credit - Wells Fargo Bank

On July 25, 2013 Siena closed on a revolving line of credit with Wells Fargo Bank. As of June 30, 2015 this revolving line is for $65,000 with an interest rate of LIBOR plus 250 basis points and a maturity date of October 17, 2016.

Subordinated note - Solaia Credit

On April 9, 2015, Siena entered into a $3,500 subordinated promissory note with Solaia Credit Strategies LLC, an affiliate of Solaia Capital Management LLC, which owns approximately 38% of Siena. The note has a maturity date of April 9, 2020 or six months following maturity of the Wells Fargo facility described above. The note has an interest rate of 12.50%. Siena may

Page F-37
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

prepay the note following the first anniversary of issuance but is required to pay a prepayment premium expensed as a percentage of the prepayment amount as follows: 3.0% prior to the second anniversary of issuance; 2.0% after the second but before the third anniversary and 1.0% after the third but before the fourth anniversary.

Care

Mortgage borrowings

The three separate non-recourse loans (each, a Greenfield VA Lease Loan and collectively, the Greenfield VA Lease Loans) with KeyCorp Real Estate Capital Markets, Inc. (KeyCorp) have an aggregate balance of $14,932 as of June 30, 2015. The Greenfield VA Lease Loans bear interest at a fixed rate of 4.76%, amortize over a thirty-year period, provide for monthly interest and principal payments and mature on May 1, 2022. The Greenfield VA Lease Loans are secured by separate cross-collateralized, cross-defaulted first priority deeds of trust on each of the Greenfield VA Lease properties. As of June 30, 2015, management believes Care is in compliance with the representations and covenants for this loan transaction.

The two separate loans from Liberty Bank for the Calamar Properties have an aggregate balance of $17,518 as of June 30, 2015. Both of these loans amortize over a thirty year period at a weighted average fixed rate of 4.21%. These loans are secured by separate first priority mortgages on each of the properties. As of June 30, 2015, management believes Care is in compliance with the representations and covenants for this loan transaction.

The two separate loans from First Niagara Bank for the Terraces Portfolio have an aggregate balance of $15,467 as of June 30, 2015. Both of these loans amortize over a twenty-five year period at a floating rate of LIBOR plus 2.50%. These loans are secured by separate first priority mortgages on each of the properties. As of June 30, 2015, management believes Care is in compliance with the representations and covenants for this loan transaction.

The two separate loans from First Niagara Bank for the Heritage Portfolio have an aggregate balance of $31,819 as of June 30, 2015. Both of these loans amortize over a twenty-five year period at a floating rate of LIBOR plus 2.75%. These loans are secured by separate first priority mortgages on each of the properties. As of June 30, 2015, management believes Care is in compliance with the representations and covenants for this loan transaction.

The loan with Synovus Bank for the Greenfield Portfolio - JV has an aggregate balance of $22,542 as of June 30, 2015. The loan includes 36 months of interest only payments and amortizes over a thirty year period at a floating rate of LIBOR plus 3.20%. The loan is secured by first priority mortgages on each of the properties. As of June 30, 2015, management believes Care is in compliance with the representations and covenants for this loan transaction.

The HUD loan from Red Mortgage Capital for the additional Heritage Portfolio seniors housing community has an aggregate balance of $6,006 as of June 30, 2015. The loan amortizes over a thirty year period at a fixed rate of 4.72%. The loan is secured by a first priority mortgage on the property. As of June 30, 2015, management believes Care is in compliance with the representations and covenants for this loan transaction.

Effective February 9, 2015, in connection with Care and Royal’s joint venture acquisition of five seniors housing communities, the joint venture entered into a $22,500, five year loan. The agreement includes 36 months of interest only payments and a $2,000 commitment which will be available to be drawn on between February 9, 2016 and February 9, 2019, subject to certain conditions. As of June 30, 2015 the loan had an aggregate balance of $19,943. As of June 30, 2015, management believes Care is in compliance with the representations and covenants for this loan transaction.

Effective March 30, 2015, affiliates of Care secured a $39,500, 10 year loan, in connection with its acquisition of six seniors housing communities. As of June 30, 2015 the loan had an aggregate balance of $38,700. As of June 30, 2015, management believes Care is in compliance with the representations and covenants for this loan transaction.

Luxury
Mortgage Warehouse Borrowing

As of June 30, 2015, Luxury has three separate warehouse lines of credit in place and the total maximum aggregate amount Luxury may borrow on these three warehouse lines of credit is $87,500. The credit agreements pay a floating rate of LIBOR plus 2.75% (with a minimum LIBOR of 3.00%). Luxury’s three credit agreements contain customary financial covenants that

Page F-38
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

require, among other items, minimum amounts of tangible net worth, profitability, maximum indebtedness ratios, and minimum liquid assets. As of June 30, 2015, Luxury believes it was in compliance with financial covenants.

Notes Payable

On January 31, 2014, Luxury issued a series of notes to pay several former shareholders of Luxury as part of the acquisition of Luxury by Tiptree. Although the notes accrue interest at a rate of 12.0% per annum, payments to former shareholders are subject to cash available for distribution based on the profitability of Luxury subject to stipulations governed by the note agreements. The notes all mature on January 31, 2021.
Mortgage Borrowing

In December 2013, Luxury entered into a mortgage note agreement with the Bank of Danbury. The mortgage note has a term of ten years and the monthly payments are based upon a twenty-five year amortization schedule. The mortgage note has a floating rate of Prime plus 1.00%. The mortgage note is secured by the underlying rental property, a guaranty by Luxury, and a personal guaranty by one of the shareholders of Luxury.

Fortegra
Secured Credit Agreement - Wells Fargo Bank, N.A.

On December 4, 2014, Fortegra entered into an amended and restated $140,000 secured credit agreement (the Credit Agreement) among: (i) Fortegra and its wholly owned subsidiary LOTS Intermediate Co. (LOTS), as borrowers (Fortegra and LOTS, collectively, the Borrowers); (ii) the initial lenders named therein; and (iii) Wells Fargo Bank, National Association, as administrative agent, swingline lender, and issuing lender. The Credit Agreement provides for a $50,000 term loan facility and a $90,000 revolving credit facility. Subject to earlier termination, the Credit Agreement terminates on December 4, 2019. The weighted average rate paid for the six months ended June 30, 2015 was 3.18%. The Borrowers are required to repay the aggregate outstanding principal amount of the initial $50,000 term loan facility in consecutive quarterly installments of $1,250 that commenced on March 2015.

Fortegra believes it was in compliance with the covenants required by the respective Credit Agreement in effect at June 30, 2015.

Revolving Line of Credit - Synovus Bank

Fortegra has a $15,000 revolving line of credit agreement (the Line of Credit) with Synovus Bank, entered into on October 9, 2013, with a maturity date of April 30, 2017.  The Line of Credit bears interest at a rate of 300 basis points plus 90-day LIBOR, and is available specifically for the South Bay premium financing product. The weighted average rate paid for the six months ended June 30, 2015 was 3.27%.

At June 30, 2015, Fortegra believes it was in compliance with the covenants required by the Line of Credit.

Preferred Trust Securities

Fortegra has $35,000 of preferred trust securities due June 15, 2037. The preferred trust securities bear interest at a floating rate of 3-month LIBOR plus the annual base rate of 4.10%. Interest is payable quarterly. In 2012, Fortegra entered into an interest rate swap that exchanges the floating rate for a fixed rate, as further described in Note 14—Derivative Financial Instruments and Hedging. The Company may redeem the preferred trust securities, in whole or in part, at a price equal to the full outstanding principal amount of such preferred trust securities outstanding plus accrued and unpaid interest.

Telos Credit Opportunities Fund
On May 5, 2015, a subsidiary of Telos Credit Opportunities Fund, L.P. (Telos Credit Opportunities), a leveraged loan fund in which Tiptree is the sole investor and which is managed by Tiptree’s Telos Asset Management LLC subsidiary, entered into an asset based secured credit facility of up to $125,000 with Capital One, N.A. as administrative agent and the lenders party thereto. The credit agreement has a maturity date of May 5, 2020. As of June 30, 2015, $11,000 was outstanding under the credit agreement with a weighted average interest rate of 2.69% for the period ended June 30, 2015.

Page F-39
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

Telos Credit Opportunities may prepay borrowings under the facility but is required to pay a prepayment premium expressed as a percentage of the amount prepaid as follows: 1.5% if prior to May 5, 2016 and 1% if prior to May 5, 2017.
Consolidated CLOs

The Company includes in its consolidated balance sheets, as part of liabilities of consolidated CLOs, the debt obligations used to finance the investment in corporate loans and other investments owned by the CLOs that it manages. See Note 13—CLOs and Consolidated Variable Interest Entities, for additional information.

(16) Commitments and Contingencies

Contractual Obligations

The table below summarizes the Company’s contractual obligations by period that payments are due:
 
June 30, 2015
 
Less than one year
 
1-3 years
 
3-5 years
 
More than 5 years
 
Total
Operating lease obligations (1)
$
3,536

 
$
6,340

 
$
4,235

 
$
2,881

 
$
16,992

Total
$
3,536

 
$
6,340

 
$
4,235

 
$
2,881

 
$
16,992

(1) Minimum rental obligations for Tiptree, Care, MFCA, Siena, Luxury and Fortegra office leases. For the six months ended June 30, 2015 and 2014, rent expense for the Company’s office leases were $2,387 and $1,192, respectively.

In addition, Tiptree’s subsidiary Siena issues standby letters of credit for credit enhancements that are required by their borrower’s respective businesses. As of June 30, 2015 there was $3,315 outstanding relating to these letters of credit.
See Note 15—Debt, for information regarding the Company’s debt obligations.
Litigation
Tiptree’s Fortegra subsidiary is a defendant in Mullins v. Southern Financial Life Insurance Co., which was filed on February 2, 2006, in the Pike Circuit Court, in the Commonwealth of Kentucky. A class was certified on June 25, 2010. At issue is the duration or term of coverage under certain policies. The action alleges violations of the Consumer Protection Act and certain insurance statutes, as well as common law fraud. The action seeks compensatory and punitive damages, attorney fees and interest. Plaintiffs filed a Motion for Sanctions on April 5, 2012 in connection with Fortegra's efforts to locate and gather certificates and other documents from Fortegra's agents. While the court did not award sanctions, it did order Fortegra to subpoena certain records from its agents. Although Fortegra appealed the order on numerous grounds, the Kentucky Supreme Court ultimately denied the appeal in April 2014. Consequently, Fortegra has retained a special master to facilitate the collection of certificates and other documents from Fortegra's agents. On January 29, 2015, the trial court issued an Order denying Fortegra’s motion to decertify the class, which Fortegra has appealed. On July 8, 2015, the Kentucky Court of Appeals denied Fortegra’s appeal, on the grounds that the court lacked subject-matter jurisdiction. No trial or hearings are currently scheduled.

Tiptree considers such litigation customary in Fortegra’s lines of business. In management's opinion, based on information available at this time, the ultimate resolution of such litigation, which it is vigorously defending, should not be materially adverse to the financial position of Tiptree. It should be noted that large punitive damage awards, bearing little relation to actual damages sustained by plaintiffs, have been awarded in certain states against other companies in the credit insurance business. At this time, the Company cannot estimate a range of loss that is reasonably possible.

Tiptree and its subsidiaries are parties to other legal proceedings in the ordinary course of business. Although Tiptree’s legal and financial liability with respect to such proceedings cannot be estimated with certainty, Tiptree does not believe that these proceedings, either individually or in the aggregate, are likely to have a material adverse effect on Tiptree’s financial position.


Page F-40
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

(17) Fair Value of Financial Instruments

The following tables present the fair values and carrying values of the Company’s financial assets and liabilities, including the balances associated with the consolidated CLOs, measured on a recurring basis and the associated fair value hierarchy amounts:
 
 
 
As of June 30, 2015
 
 
 
Quoted prices in
 active markets
Level 1
 
 Other significant
 observable inputs
 Level 2
 
 Significant unobservable inputs
Level 3
 
Fair value
 
Carrying value
Assets:
 
 
 
 
 
 
 
 
 
Trading assets:
 
 
 
 
 
 
 
 
 
Equity securities
$
—

 
$
—

 
$
8,941

 
$
8,941

 
$
8,941

Tax exempt securities
—

 
8,225

 
1,836

 
10,061

 
10,061

CDO
—

 
—

 
220

 
220

 
220

CLO
—

 
—

 
750

 
750

 
750

Total trading securities
—

 
8,225

 
11,747

 
19,972

 
19,972

 
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
IRLC
—

 
—

 
1,459

 
1,459

 
1,459

TBA mortgage backed securities
—

 
53

 
—

 
53

 
53

Credit derivatives
—

 
10,340

 
—

 
10,340

 
10,340

Total derivative assets
—

 
10,393

 
1,459

 
11,852

 
11,852

 
 
 
 
 
 
 
 
 
 
Total trading assets
—

 
18,618

 
13,206

 
31,824

 
31,824

 

 


 


 


 

Available for sale securities:
 
 
 
 
 
 
 
 
 
Equity securities
5,839

 
—

 
1,047

 
6,886

 
6,886

U.S. Treasury securities and U.S. government agencies
—

 
61,895

 
—

 
61,895

 
61,895

Obligations of state and political subdivisions
—

 
39,775

 
—

 
39,775

 
39,775

Obligations of foreign governments
—

 
2,631

 
—

 
2,631

 
2,631

Certificates of deposit
891

 
—

 
—

 
891

 
891

Corporate bonds
—

 
67,694

 
—

 
67,694

 
67,694

 Total available for sale securities
6,730

 
171,995

 
1,047

 
179,772

 
179,772

 
 
 
 
 
 
 
 
 
 
Mortgage loans held for sale
—

 
56,417

 
—

 
56,417

 
56,417

Investments in loans
—

 
26,179

 
37,539

 
63,718

 
63,718

 
 
 
 
 
 
 
 
 
 
Financial instruments included in assets of consolidated CLOs:
 
 
 
 
 
 
 
 
 
Equity securities
—

 
1,291

 
5,047

 
6,338

 
6,338

Investments in CLOs
—

 
—

 
4,000

 
4,000

 
4,000

IRS
—

 
54

 
—

 
54

 
54

Investments in loans
—

 
1,320,125

 
425,809

 
1,745,934

 
1,745,934

Total financial instruments included in assets of consolidated CLOs
—

 
1,321,470

 
434,856

 
1,756,326

 
1,756,326

 
 
 
 
 
 
 
 
 
 
 Total
$
6,730

 
$
1,594,679

 
$
486,648

 
$
2,088,057

 
$
2,088,057

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Trading liabilities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
—

 
$
19,617

 
$
—

 
$
19,617

 
$
19,617

IRS
—

 
2,754

 
—

 
2,754

 
2,754

Total trading liabilities
—

 
22,371

 
—

 
22,371

 
22,371

 
 
 
 
 
 
 
 
 
 
Financial instruments included in liabilities of consolidated CLOs:
 
 
 
 
 
 
 
 
 
Notes payable of CLOs
—

 
—

 
1,789,223

 
1,789,223

 
1,789,223

Total financial instruments included in liabilities of consolidated CLOs
—

 
—

 
1,789,223

 
1,789,223

 
1,789,223

 
 
 
 
 
 
 
 
 
 
 Total
$
—

 
$
22,371

 
$
1,789,223

 
$
1,811,594

 
$
1,811,594



Page F-41
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

 
 
 
As of December 31, 2014
 
 
 
Quoted prices in
 active markets
Level 1
 
 Other significant
 observable inputs
 Level 2
 
 Significant unobservable inputs
Level 3
 
Fair value
 
Carrying value
Assets:
 
 
 
 
 
 
 
 
 
Trading assets:
 
 
 
 
 
 
 
 
 
Equity securities
$
—

 
$
—

 
$
4,171

 
$
4,171

 
$
4,171

Tax exempt securities
—

 
11,230

 
2,011

 
13,241

 
13,241

CDO
—

 
—

 
180

 
180

 
180

CLO
—

 
—

 
945

 
945

 
945

Total trading securities
—

 
11,230

 
7,307

 
18,537

 
18,537

 
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
IRLC
—

 
17

 
776

 
793

 
793

Credit derivatives
—

 
10,833

 
—

 
10,833

 
10,833

Total derivative assets
—


10,850


776

 
11,626

 
11,626

 
 
 
 
 
 
 
 
 
 
Total trading assets
—

 
22,080

 
8,083

 
30,163

 
30,163

 

 


 


 


 

Available for sale securities:
 
 
 
 
 
 
 
 
 
Equity securities
6,003

 
—

 
1,047

 
7,050

 
7,050

U.S. Treasury securities and U.S. government agencies
—

 
58,239

 
—

 
58,239

 
58,239

Obligations of state and political subdivisions
—

 
35,872

 
—

 
35,872

 
35,872

Obligations of foreign governments
—

 
1,620

 
—

 
1,620

 
1,620

Certificates of deposit
871

 
—

 
—

 
871

 
871

Corporate bonds
—

 
67,476

 
—

 
67,476

 
67,476

 Total available for sale securities
6,874


163,207


1,047

 
171,128

 
171,128

 
 
 
 
 
 
 
 
 
 
Mortgage loans held for sale
—

 
28,661

 
—

 
28,661

 
28,661

Investments in loans
—

 
154

 
2,447

 
2,601

 
2,601

 
 
 
 
 
 
 
 
 
 
Financial instruments included in assets of consolidated CLOs:
 
 
 
 
 
 
 
 
 
Equity securities
—

 
91

 
3,012

 
3,103

 
3,103

Investments in CLOs and CDOs
—

 
—

 
18,755

 
18,755

 
18,755

Investments in loans
—

 
1,248,161

 
555,044

 
1,803,205

 
1,803,205

Total financial instruments included in assets of consolidated CLOs
—

 
1,248,252

 
576,811

 
1,825,063

 
1,825,063

 
 
 
 
 
 
 
 
 
 
Financial instruments included in assets held for sale:
 
 
 
 
 
 
 
 
 
Available for sale securities
100

 
17,309

 
—

 
17,409

 
17,409

Separate account assets
292,398

 
735,528

 
3,771,503

 
4,799,429

 
4,799,429

Total financial instruments included in assets held for sale
292,498

 
752,837

 
3,771,503

 
4,816,838

 
4,816,838

 
 
 
 
 
 
 
 
 
 
 Total
$
299,372


$
2,215,191


$
4,359,891


$
6,874,454


$
6,874,454

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 

 
 
 
 
Trading liabilities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
$
—

 
$
19,660

 
$
—

 
$
19,660

 
$
19,660

IRS
—

 
2,913

 
—

 
2,913

 
2,913

Total trading liabilities
—

 
22,573

 
—

 
22,573

 
22,573

 
 
 
 
 
 
 
 
 
 
Financial instruments included in liabilities of consolidated CLOs:
 
 
 
 
 
 
 
 
 
IRS
—

 
126

 
—

 
126

 
126

Notes payable of CLOs
—

 
—

 
1,785,207

 
1,785,207

 
1,785,207

Total financial instruments included in liabilities of consolidated CLOs
—

 
126

 
1,785,207

 
1,785,333

 
1,785,333

 
 
 
 
 
 
 
 
 
 
Total
$
—

 
$
22,699

 
$
1,785,207

 
$
1,807,906

 
$
1,807,906



Page F-42
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

The following table represents additional information about assets that are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value for the following periods:        
 
2015
 
2014
 
Non-CLO assets
 
CLO assets
 
Assets held for sale
 
Non-CLO assets
 
CLO assets
 
Assets held for sale
Balance at January 1,
$
11,577

 
$
576,811

 
$
3,771,458

 
$
5,231

 
$
49,910

 
$
3,833,401

Net realized gains/(losses)
2,445

 
1,796

 
—

 
—

 
880

 
—

Net unrealized gains/(losses)
740

 
(4,326
)
 
—

 
(23
)
 
172

 
—

Purchases
—

 
12,422

 
47,633

 
—

 
394

 
40,914

Sales
(109
)
 
(41,357
)
 
(35,352
)
 
—

 
(11,751
)
 
(56,940
)
Issuances
—

 
772

 
—

 
2

 
529

 
—

Transfers into Level 3
—

 
127,721

 
—

 
44,532

 
327,803

 
—

Transfers (out of) Level 3
(2,904
)
 
(217,586
)
 
—

 
—

 
(1,615
)
 
(287
)
Attributable to policyowner
—

 
—

 
23,918

 
—

 
—

 
43,750

Balance at March 31,
$
11,749

 
$
456,253

 
$
3,807,657

 
$
49,742

 
$
366,322

 
$
3,860,838

Net realized gains/(losses)
4,152

 
(3,278
)
 
—

 
—

 
602

 
—

Net unrealized gains/(losses)
44

 
6,367

 
—

 
316

 
(551
)
 
—

Purchases
4,771

 
11,001

 
93,659

 
—

 
3,353

 
52,099

Sales
(31
)
 
(61,821
)
 
(157,960
)
 
(1,991
)
 
(50,885
)
 
(73,992
)
Issuances
1

 
500

 
—

 
2

 
759

 
—

Transfer adjustments into Level 3
36,039

 
19,287

 
—

 
20,040

 
200,950

 
—

Transfer adjustments (out of) Level 3
(4,933
)
 
6,547

 
—

 
(37,223
)
 
(93,145
)
 
—

Attributable to policyowner
—

 
—

 
31,130

 
—

 
—

 
82,858

Disposition of assets held for sale
—

 
—

 
(3,774,486
)
 
—

 
—

 
—

Balance at June 30,
$
51,792

 
$
434,856

 
$
—


$
30,886

 
$
427,405

 
$
3,921,803

 
 
 
 
 
 
 
 
 
 
 
 
Changes in unrealized gains included in earnings related to assets still held at period end
$
(241
)
 
$
1,580

 
$
—

 
$
465

 
$
(379
)
 
$
—

For the six months ended June 30, 2015, non-CLO assets of $36,039 were transferred from Level 2 to Level 3 and $7,837 were transferred from Level 3 to Level 2. These transfers were primarily due to the limited depth underlying the prices of corporate loans as well as changes to the depth supporting those prices at different measurement dates.

For the six months ended June 30, 2015, CLO assets of $147,008 were transferred from Level 2 to Level 3 and $211,039 were transferred from Level 3 to Level 2. These transfers were primarily due to the limited depth underlying the prices of corporate loans as well as changes to the depth supporting those prices at different measurement dates.

For the six months ended June 30, 2014, non-CLO assets of $64,572 were transferred from Level 2 to Level 3. These transfers were primarily due to tax exempt securities, as well as the limited depth underlying the prices of corporate loans as well as changes to the depth supporting those prices at different measurement dates.

For the six months ended June 30, 2014, non-CLO assets of $37,223 were transferred from Level 3 to Level 2. These transfers were primarily due to the limited depth underlying the prices of corporate loans as well as changes to the depth supporting those prices at different measurement dates.

For the six months ended June 30, 2014, CLO assets of $528,753 were transferred from Level 2 to Level 3 and $94,760 were transferred from Level 3 to Level 2. These transfers were primarily due to the limited depth underlying the prices of corporate loans as well as changes to the depth supporting those prices at different measurement dates.

ASC Topic 820, as amended by ASU 2011-04, requires disclosure of quantitative information about the significant unobservable inputs used in the valuation of assets and liabilities classified as Level 3 within the fair value hierarchy. Disclosure of this information is not required in circumstances where a valuation (unadjusted) is obtained from a third-party pricing service and the information regarding the unobservable inputs is not reasonably available to the Company. As such, the disclosure provided

Page F-43
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

below provides quantitative information only about the significant unobservable inputs used in the valuation of certain tax-exempt municipal securities.
 
Fair Value as of
 
 
 
 
 
Actual or Range (Weighted average)
Assets
June 30, 2015
 
December 31, 2014
 
Valuation Technique
 
Unobservable input(s)
 
June 30, 2015
 
December 31, 2014
Trading Securities:
 
 
 
 
 
 
 
 
 
 
 
Tax-exempt municipal
$
145

 
$
199

 
Discounted cash flow
 
Short and long term cash flows
 
0.7052%
 
.58% - 33.32%
Total
$
145

 
$
199

 
 
 
 
 
 
 
 
The following tables show the fair values and carrying values of the Company’s financial assets and liabilities and the fair value hierarchy level(s) associated with these assets and liabilities:
 
As of June 30, 2015
 
 Level within
Fair Value
Hierarchy
 
Fair Value
 
Carrying Value
Assets:
 
 
 
 
 
Cash and cash equivalents-unrestricted
1
 
$
170,100

 
$
170,100

Cash and cash equivalents-restricted
1
 
30,085

 
30,085

Trading assets
2,3
 
31,824

 
31,824

Available for sale securities
1,2,3
 
179,772

 
179,772

Mortgage loans held for sale
2
 
56,417

 
56,417

Investments in loans
2,3
 
63,718

 
63,718

Loans owned
2
 
51,439

 
51,439

Notes receivable, net
2
 
20,050

 
21,647

Accounts and premiums receivable, net
2
 
56,947

 
56,947

Reinsurance receivables
1,2
 
300,065

 
300,065

Other receivables
2
 
39,560

 
39,560

Assets of consolidated CLOs
1,2,3
 
1,883,030

 
1,883,030

Total Assets
 
 
$
2,883,007

 
$
2,884,604

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Trading liabilities
1,2
 
$
22,371

 
$
22,371

Debt
3
 
461,820

 
464,372

Liabilities of consolidated CLOs
2,3
 
1,835,238

 
1,835,238

Liabilities of discontinued operations and held for sale
1,2,3
 
—

 
—

Total Liabilities
 
 
$
2,319,429

 
$
2,321,981


Page F-44
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

 
As of December 31, 2014
 
 Level within
Fair Value
Hierarchy
 
Fair Value
 
Carrying Value
Assets:
 
 
 
 
 
Cash and cash equivalents-unrestricted
1
 
$
52,987

 
$
52,987

Cash and cash equivalents-restricted
1
 
28,045

 
28,045

Trading assets
2,3
 
30,163

 
30,163

Available for sale securities
1,2,3
 
171,128

 
171,128

Mortgage loans held for sale
2
 
28,661

 
28,661

Investments in loans
2,3
 
2,601

 
2,601

Loans owned
2
 
36,095

 
36,095

Notes receivable, net
2
 
21,916

 
21,916

Accounts and premiums receivable, net
2
 
39,666

 
39,666

Reinsurance receivable
2
 
264,776

 
264,776

Other receivables
2
 
36,068

 
36,068

Assets of consolidated CLOs
1,2,3
 
1,978,094

 
1,978,094

Assets held for sale
1,2,3
 
5,129,745

 
5,129,745

Total Assets
 
 
$
7,819,945

 
$
7,819,945

 
 
 

 

Liabilities:
 
 

 

Trading liabilities
1
 
$
22,573

 
$
22,573

Debt
3
 
364,756

 
363,199

Liabilities of consolidated CLOs
2,3
 
1,877,377

 
1,877,377

Liabilities of discontinued operations and held for sale
1,2,3
 
5,006,901

 
5,006,901

Total Liabilities
 
 
$
7,271,607

 
$
7,270,050


(18) Stockholders’ Equity

Tiptree’s authorized capital stock consists of 100,000,000 shares of preferred stock, $0.001 par value, 200,000,000 shares of Class A common stock, $0.001 par value, and 50,000,000 shares of Class B common stock, $0.001 par value. As of June 30, 2015 and December 31, 2014, no shares of preferred stock were issued and outstanding. As of June 30, 2015 and December 31, 2014, there were 31,764,200 and 31,830,174 shares of Class A common stock issued and outstanding, respectively. As of June 30, 2015 and December 31, 2014, there were 9,766,537 and 9,770,367 shares of Class B common stock issued and outstanding, respectively.

All shares of our Class A common stock have equal rights as to earnings, assets, dividends and voting. Shares of Class B common stock have equal voting rights but no economic rights (including no right to receive dividends or other distributions upon liquidation, dissolution or otherwise). Distributions may be paid to holders of Class A common stock if, as and when duly authorized by our board of directors and declared out of assets legally available therefor.

For the three and the six months ended June 30, 2015, the Company declared dividends of $0.025 and $0.05, respectively, per common share of Class A stock. For the three and the six months ended June 30, 2014, the Company did not declare or pay any cash dividends.


Page F-45
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

(19) Accumulated Other Comprehensive Income

The following table presents the activity in accumulated other comprehensive income/(loss) (AOCI), net of tax, for the following period:
 
Unrealized gains/ (losses) on securities
 
Unrealized gains/(losses) on interest rate swap
 
Total
Balance at December 31, 2014
$
(195
)
 
$
146

 
$
(49
)
Other comprehensive gain (loss) before reclassification
(422
)
 
(188
)
 
(610
)
Amounts reclassified from AOCI
27

 
367

 
394

Period change
(395
)
 
179

 
(216
)
Balance at June 30, 2015
$
(590
)
 
$
325

 
$
(265
)
The following table presents the reclassification adjustments out of AOCI included in net income and the impacted line items on the income statement for the following periods:
 
Three months ended June 30,
 
Six months ended June 30,
 
 
Components of AOCI
2015
 
2014
 
2015
 
2014
 
Affected line item in statement where net income is presented
Unrealized gains on available for sale securities
$
26

 
$
9

 
$
41

 
$
14

 
Net realized gains on investments
Related tax (expense)
(9
)
 
(3
)
 
(14
)
 
(5
)
 
Provision for income tax
 
$
17

 
$
6

 
$
27

 
$
9

 
Net change after tax
 
 
 
 
 
 
 
 
 
 
Unrealized (losses) on interest rate swap
$
(283
)
 
$
—

 
$
(564
)
 
$
—

 
Interest expense
Related tax benefit
99

 
—

 
197

 
—

 
Provision for income tax
 
$
(184
)
 
$
—

 
$
(367
)
 
$
—

 
Net change after tax

(20) Stock Based Compensation

Equity Plans

In June 2007, the Company adopted the Care Investment Trust Inc. Equity Plan (2007 Equity Plan), as amended in December 2011, which provides for the issuance of equity-based awards, including stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock awards and other awards based upon the Company’s Class A common stock that may be made to directors and executive officers, employees and to the Company’s advisors and consultants who are providing services to the Company as of the date of the grant of the award.

The 2007 Equity Plan will automatically expire on the 10th anniversary of the date it was adopted. The Board of Directors may terminate, amend, modify or suspend the 2007 Equity Plan at any time, subject to stockholder approval in the case of certain amendments as required by law, regulation or stock exchange.

The Board adopted the Tiptree 2013 Omnibus Incentive Plan (2013 Equity Plan) on August 8, 2013. The general purpose of the 2013 Equity Plan is to attract, motivate and retain selected employees, consultants and directors for the Company, to provide them with incentives and rewards for superior performance and to better align their interests with the interests of the Company’s stockholders. As of June 30, 2015, 240,791 shares of immediately vested Class A common stock with an aggregate fair market value of $1,943 were issued to employees and persons providing services to the Company as incentive compensation under the 2013 Equity Plan. As of June 30, 2015, the number of shares of Tiptree’s Class A common stock available for award under the 2013 Equity Plan is 1,541,454 shares of Class A common stock. Unless otherwise extended by the Board, the 2013 Equity Plan terminates automatically on August 8, 2023, the tenth anniversary of its adoption by the Board.

Included in vested shares for 2015 are 6,580 shares surrendered to pay taxes on behalf of the employees with shares vesting. Immediately vested shares of common stock issued to the Company’s independent directors in respect to their annual retainer fees have been issued under the 2013 Equity Plan. During the period ended June 30, 2015, the Company issued 11,029 immediately

Page F-46
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

vested shares of Class A common stock with an aggregate fair value of $80 to the Company’s independent directors as part of their annual retainer.

The table below summarizes changes to the issuances under the Company’s 2013 Equity Plan for the following period:
 
Number of shares issued
Available for issuance as of December 31, 2014
1,793,274

Shares Issued
(251,820
)
Available for issuance as of June 30, 2015
1,541,454

In June 2007, the Company adopted the Care Investment Trust Inc. Manager Equity Plan, which will automatically expire on the 10th anniversary of the date it was adopted. As of June 30, 2015, 134,629 common shares remain available for future issuances. No shares have been issued since March 30, 2012 from this plan.
Restricted share units
A holder of the restricted share units, as per the terms of the restricted stock unit agreement governing the awards, have all of the rights of a shareholder, including the right to vote and receive distributions. The restricted share units shall vest and become nonforfeitable with respect to one‑third of Tiptree shares granted on each of the first, second, and third anniversaries of the date of the grant.
The following table summarizes changes to the issuances of Restricted Stock Units under the Company’s 2007 and 2013 Equity Plan for the periods indicated:
 
Number of shares issuable in respect of RSUs
Unvested units as of December 31, 2014
38,625

Granted
81,500

Vested
(24,785
)
Forfeited
—

Unvested units as of June 30, 2015
95,340

On January 5, 2015 the Company granted 81,500 shares to employees of the Company. The shares have a grant date fair value of $643 and will vest over a period of three years beginning on January 5, 2015.

As of June 30, 2015, the total unrecognized compensation cost related to restricted units granted was $592, which is expected to be recognized as compensation expense over a weighted average period of approximately two years.

Restricted stock unit expense was $79 and $101 for the three months ended June 30, 2015 and 2014, respectively. Restricted stock unit expense was $148 and $113 for the six months ended June 30, 2015 and 2014, respectively. These expenses are included within payroll expense in the consolidated statements of income.

(21) Related Party Transactions

Tricadia Holdings, L.P.
On June 30, 2012, Tiptree Asset Management Company, LLC (TAMCO), Tiptree Financial Partners, L.P. (TFP) and Tricadia Holdings LP (Tricadia) entered into a transition services agreement in connection with the internalization of the management of Tiptree. Pursuant to this agreement, Tricadia provides TAMCO and its affiliates, including TFP, with the services of designated officers as well as certain back office, administrative, information technology, insurance, legal and accounting services. The transition services agreement was assigned to the Company in connection with the closing on July 1, 2013 of the transactions pursuant to the contribution agreement by and between the Company, Operating Company and TFP, dated December 1, 2012 (Contribution Transactions). The Company pays Tricadia specified prices per service. The Company owed a total fee to Tricadia of $337 and $339 for the three months ended June 30, 2015 and 2014, respectively and $675 and $651 for the six months ended June 30, 2015 and 2014, respectively.

Page F-47
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

Mariner Investment Group LLC
TFP and Back Office Services Group, Inc. (BOSG) entered into an administrative services agreement on June 12, 2007 (Administrative Services Agreement), which was assigned to the Operating Company on July 1, 2013 in connection with the Contribution Transactions, under which BOSG provides the services of certain back office, administrative and accounting services to the Company. BOSG is an affiliate of Mariner Investment Group (Mariner). Under the Administrative Services Agreement, the Company pays BOSG a quarterly fee of 0.025% of the Company’s Net Assets, defined as the Company’s total assets less total liabilities, including accrued income and expense, calculated in accordance with GAAP. This fee totaled $94 and $103 for the three months ended June 30, 2015 and 2014, respectively and $189 and $205 for the six months ended June 30, 2015 and 2014, respectively. The Administrative Services Agreement has successive one year terms but may be terminated by the Company or BOSG upon 60 days prior notice.

(22) Concentration of Credit Risk

Counterparties

The Company is subject to certain inherent credit risks arising from its transactions involving counterparties to CDS, CDX and IRS positions.
As of June 30, 2015, the CDS and CDX positions have a notional amount of $2,397 and notional amount of $595,785 ($297,612 of sold protection and $298,173 of bought protection) and a fair value of $87 and $10,252. The counterparty for the CDS and CDX positions are Bank of America, N.A. and Morgan Stanley, respectively.
As of June 30, 2015, the IRS positions have an aggregate notional amount of $78,988 and a fair value of $(2,754). The counterparties for the IRS positions are First Niagara Bank and Wells Fargo Bank, N.A.
The Company’s policy is to monitor its market exposure and counterparty risk through the use of various credit exposure reporting and control procedures.
See Note 14—Derivative Financial Instruments and Hedging, for further details.

(23) Income Taxes

The total income tax benefit of $371 and benefit of $1,080 for the three months ended June 30, 2015 and 2014, respectively, and total tax benefit of $1,867 and benefit of $1,732 for the six months ended June 30, 2015 and 2014, respectively, is reflected as a component of income / (loss) from continuing operations.

For the six months ended June 30, 2015, the Company’s effective tax rate on income from continuing operations was equal to 45.3%, which does not bear a customary relationship to statutory income tax rates. The tax rate for the six months ended June 30, 2015 is higher than the U.S. statutory income tax rate of 35%, primarily due to taxes incurred at certain corporate subsidiaries that do not consolidate with the Company’s taxable income, tax losses generated at certain of our taxable subsidiaries which require a valuation allowance and do not generate an income tax benefit, and state income taxes incurred on a separate legal entity basis.

(24) Earnings Per Share

The Company calculates basic net income per common share based on the Company’s common stock outstanding as well as its unvested restricted share units. The unvested restricted share units are included because they are eligible to receive dividends. Diluted net income for the period takes into account the effect of dilutive instruments, such as any options on common shares, but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of common shares outstanding. Diluted net income also includes the minimal dilutive impact of the 3,609,420 Operating Company warrants held by TFP as part of the Contribution Transactions as summarized in Note 1—Organization of the Company’s Form 10-K for the fiscal year ended December 31, 2014. Earnings per share data excludes Tiptree’s Class B common stock, as the Class B common stock evidences a voting right without any economic interest.


Page F-48
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

The following table presents a reconciliation of basic and diluted net income per common share for the following periods:
 
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Net (loss) income from continuing operations
$
(1,209
)
 
$
1,836

 
$
(5,573
)
 
$
4,148

Less:
 
 
 
 
 
 
 
Net income from continuing operations attributable to non-controlling interests (1)
(183
)
 
311

 
(1,871
)
 
1,299

Net (loss) income from continuing operations available to Class A common shares
(1,026
)
 
1,525

 
(3,702
)
 
2,849

 
 
 
 
 
 
 
 
Discontinued operations, net
21,003

 
2,186

 
23,348

 
3,476

Less:
 
 
 
 
 
 
 
Net income from discontinued operations attributable to non-controlling interests (1)
5,015

 
1,672

 
5,663

 
2,660

Net income from discontinued operations available to Class A common shares
15,988

 
514

 
17,685

 
816

 
 
 
 
 
 
 
 
Net income available to Class A common shares
$
14,962

 
$
2,039

 
$
13,983

 
$
3,665

 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
(Loss) income from continuing operations
$
(0.03
)
 
$
0.14

 
$
(0.11
)
 
$
0.27

Income from discontinued operations
0.50

 
0.05

 
0.55

 
0.08

Net income available to Class A common shares
$
0.47

 
$
0.19

 
$
0.44

 
$
0.35

 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
(Loss) income from continuing operations
$
(0.03
)
 
$
0.14

 
$
(0.11
)
 
$
0.27

Income from discontinued operations
0.50

 
0.05

 
0.55

 
0.08

Net income available to Class A common shares
$
0.47

 
$
0.19

 
$
0.44

 
$
0.35

 
 
 
 
 
 
 
 
Weighted average Class A common shares outstanding:
 
 
 
 
 
 
 
Basic
31,881,904

 
10,617,863

 
31,962,065

 
10,602,311

Diluted
31,881,904

 
10,617,863

 
31,962,065

 
10,602,311

(1) For the three months ended June 30, 2015, the total net income (loss) attributable to non-controlling interest was $4,832, comprised of $(183) due to continuing operations and $5,015 attributable to discontinued operations. For the three months ended June 30, 2014, the total net income attributable to non-controlling interest was $1,982, comprised of $311 due to continuing operations and $1,672 attributable to discontinued operations.
For the six months ended June 30, 2015, the total net income (loss) attributable to non-controlling interest was $3,792, comprised of $(1,871) due to continuing operations and $5,663 attributable to discontinued operations. For the six months ended June 30, 2014, the total net income attributable to non-controlling interest was $3,959, comprised of $1,299 due to continuing operations and $2,660 attributable to discontinued operations.
The above table excludes the anti-dilutive effect of the 2008 warrant convertible into 652,500 shares because the exercise price of $11.33 was greater than the average market price during such periods.

(25) Subsequent Events

On July 1, 2015, Tiptree acquired all of the outstanding equity interests of Reliance for an aggregate consideration equal to $7,500 in cash and 1,625,500 shares of Class A common stock of Tiptree. In addition, Tiptree will pay up to 2,000,000 additional shares of Class A common stock of Tiptree, annually over three years if Reliance achieves specified performance metrics after closing and in certain other circumstances. In connection with the acquisition of Reliance, a subsidiary of Tiptree entered into

Page F-49
TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2015
(in thousands, except shares and per share data)

a warehouse credit facility with Reliance pursuant to which Tiptree may provide up to $20,000 to Reliance for the purpose of originating mortgage loans. As of the date of this report, no amounts are outstanding under this warehouse credit facility. On July 20, 2015, Reliance granted membership incentive awards equal to 12.0% of the equity interests of Reliance to employees of Reliance. Of these incentive awards, 9.0% vest upon achievement of specified financial targets and the remaining 3.0% vest in four equal installments annually, in each case subject to continued employment.

On July 9, 2015, Tiptree contributed $20,000 and on August 7, 2015, an additional $10,000 to Telos 2015-7, Ltd. which entered into a warehouse credit facility in anticipation of launching a new CLO.

On August 10, 2015, the Company’s board of directors declared a quarterly cash dividend of $0.025 per share to Class A stockholders with a record date of August 24, 2015, and a payment date of August 31, 2015.

The Board has approved a stock purchase program for the purchase of up to an aggregate of $5 million of Class A common stock by the Company and Michael Barnes that has not yet commenced.

The Company has evaluated events that have occurred from June 30, 2015 through the date this Form 10-Q was filed, and except as already included in the notes to the consolidated financial statements, it believes that no events have occurred that would require recognition or additional disclosures in these consolidated financial statements.


Page F-50


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

References to “Tiptree” or the “Company” mean Tiptree Operating Company, LLC and its consolidated subsidiaries, together with the standalone net assets held by Tiptree Financial Inc.  References to “Tiptree Financial” mean Tiptree Financial Inc.  Tiptree Financial is publicly traded and owns approximately 77% of Tiptree Operating Company.

Forward-Looking Statements

Except for the historical information included and incorporated by reference in this Quarterly Report on Form 10-Q, the information included and incorporated by reference herein are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements provide management’s current expectations or forecasts of future events and are not statements of historical fact. These forward-looking statements include information about possible or assumed future events, including, among other things, discussion and analysis of our future financial condition, results of operations and our strategic plans and objectives. When the Company uses words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “should,” “target”, “will,” or similar expressions, the Company intends to identify forward-looking statements.

The forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, many of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those described in the section entitled “Risk Factors” in Tiptree’s most recent Annual Report on Form 10-K.

The factors described herein are not necessarily all of the important factors that could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements.  Other unknown or unpredictable factors also could affect our forward-looking statements. Consequently, our actual performance could be materially different from the results described or anticipated by our forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by the federal securities laws, we undertake no obligation to update any forward-looking statements.

Overview

Our Management’s Discussion and Analysis of Financial Conditions and Results of Operations is presented in this section as follows:
•
Overview
•
Results of Operations
•
Non-GAAP Financial Measures
•
Liquidity and Capital Resources
•
Critical Accounting Policies and Estimates
•
Recently Adopted and Issued Accounting Standards

The Company currently operates in five reporting segments: insurance and insurance services, specialty finance, real estate asset management, and corporate and other. See Note 6 - Operating Segment Data, in the notes to the accompanying consolidated financial statements for detailed information regarding our segments. Since different factors affect the financial condition and results of operation of each segment, the following is presented on both a consolidated and segment basis.

Significant Quarterly Events

The Company completed its previously announced sale of PFG during the second quarter. The net after-tax gain from the sale was $16.3 million. For further discussion of the sale of PFG please see Note 5—Dispositions, Assets Held for Sale and Discontinued Operations.

During the second quarter of 2015, the Company expanded its principal investments into non-performing mortgage loans and established a credit opportunity fund with the Company as its sole initial investor. The non-performing mortgage loan (“NPL”) strategy commenced with the investment of $9.7 million in the second quarter in a pool of non-performing residential mortgages securing single family properties. The Company invested $25 million in its credit opportunity strategy, which involves the leveraged purchase of commercial loans. As part of this strategy, to leverage the Company’s investment in the credit opportunities fund, it established a line of credit with a major investment bank. Further details of the Company’s principal investments in non-performing mortgage loans and the credit opportunity fund are contained in the Corporate and other segment discussion.


Page 1


The Company sold its investments in the subordinated notes issued by Telos 2 and Telos 4 to partly fund the diversification of its principal investments and to recycle capital from existing CLOs into a warehouse facility with the objective of creating new CLOs to increase asset management fees. The sales generated net cash of $39.7 million and realized losses of $8.0 million for the six months ended June 30, 2015.

Also during the second quarter, the Company increased its principal investment in Star Asia by $4.8 million through its participation in a rights offering. The fair value of the Company’s investment in Star Asia totaled $8.9 million as of June 30, 2015.

Further details on the diversification and realignment of the Company’s principal investments is contained in the Corporate and other segment discussion.
Subsequent Events

On July 1, 2015, the Company closed its previously announced acquisition of Reliance First Capital, LLC (“Reliance”). Reliance is a retail mortgage originator operating in 32 states. Its fulfillment operations are conducted through a call center and are focused on GSE and FHA/VA mortgage loans. Reliance uses warehouse lines to fund its mortgage loan originations, and then sells the loans servicing released to correspondent aggregators. Reliance’s funded volume for the first six months of 2015 was $389 million and its sold volume was $383 million. The Company believes that the acquisition of Reliance will be complementary to its existing Luxury business and will provide opportunities for future growth in the mortgage business. Reliance will be included in its specialty finance segment in future quarters.

On July 9, 2015, Tiptree contributed $20 million and on August 7, 2015, an additional $10 million to Telos 2015-7, an entity that then established a new warehouse line to leverage investments in loans in anticipation of launching a new CLO. In future quarters, similar to other CLOs that it manages and in which the Company has subordinated note investments, management income and expenses will be reported in its Asset Management Segment and the principal investment, distributions and net realized and unrealized gains on the subordinated notes the Company owns will be reported in its Corporate and other segment.


RESULTS OF OPERATIONS

Summary Consolidated Statements of Operations
($ in thousands)
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Total revenue
$
99,179

 
$
9,640

 
$
187,189

 
$
20,506

 
 
 
 
 
 
 
 
Total expense
102,675

 
15,955

 
197,287

 
29,804

 
 
 
 
 
 
 
 
Net Income attributable to consolidated CLOs
1,916

 
7,071

 
2,658

 
11,714

 
 
 
 
 
 
 
 
(Loss) income before taxes from continuing operations
(1,580
)
 
756

 
(7,440
)
 
2,416

 
 
 
 
 
 
 
 
Less: Provision (benefit) for income taxes
(371
)
 
(1,080
)
 
(1,867
)
 
(1,732
)
 
 
 
 
 
 
 
 
Discontinued operations, net
21,003

 
2,186

 
23,348

 
3,476

 
 
 
 
 
 
 
 
Net income before non-controlling interests
19,794

 
4,022

 
17,775

 
7,624

 
 
 
 
 
 
 
 
Less: net income attributable to noncontrolling interests
4,832

 
1,983

 
3,792

 
3,959

 
 
 
 
 
 
 
 
Net income available to common stockholders
$
14,962

 
$
2,039

 
$
13,983

 
$
3,665

 
 
 
 
 
 
 



Page 2







EBITDA and Adjusted EBITDA are non-GAAP financial measures. Management believes that adjusted EBITDA provides a supplementary metric to enhance investors’ understanding of the ongoing growth potential of the Company’s businesses and an indication of the cash available for re-investment of the businesses. EBITDA and Adjusted EBITDA are not a measurement of financial performance or liquidity under GAAP; therefore, EBITDA and Adjusted EBITDA should not be considered as an alternative or substitute for GAAP.
Summary adjusted EBITDA 1 (Unaudited)
(in thousands)
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Adjusted EBITDA for Continuing Operations of the Company
$
7,192

 
$
3,772

 
$
12,013

 
$
8,265

 
 
 
 
 
 
 
 
Adjusted EBITDA for Discontinued Operations of the Company
$
25,033

 
$
7,596

 
$
33,232

 
$
13,684

 
 
 
 
 
 
 
 
Total Adjusted EBITDA of the Company
$
32,225

 
$
11,368

 
$
45,245

 
$
21,949


1 For further information relating to the Company’s Adjusted EBITDA, including a reconciliation to GAAP net income, see“—Non-GAAP Financial Measures” below.

Consolidated Results of Operations

For the three months ended June 30, 2015, the Company reported after tax income of $19.8 million compared with after tax net income of $4.0 million in the comparable period of 2014. The increase of $15.8 million was primarily driven by the $27.2 million pre-tax gain (or $16.3 million after-tax gain) on the sale of the Company’s PFG subsidiary and the incorporation of Fortegra’s pre-tax earnings of $6.3 million in the second quarter of 2015, partially offset by the loss on the sale of subordinated notes in Telos 2 and Telos 4. Revenues totaled $99.2 million for the second quarter of 2015 compared with revenues of $9.6 million for the second quarter of 2014. Expenses were $102.7 million for the second quarter of 2015, compared with expenses of $16.0 million for the second quarter of 2014. The significant increase in revenues was primarily attributable to the incorporation of Fortegra’s revenues and additional rental income, which increased as a result of the expansion of the Care’s real estate investment activities, while the increase in expenses was the result of increased interest, payroll, depreciation and other expenses attributable to both Fortegra and Care, plus the loss on the sale of the subordinated notes of Telos 2 and Telos 4.

Management believes that adjusted EBITDA provides a supplementary metric to enhance investors’ understanding of the on-going growth potential of the Company’s businesses and an indication of the cash available for re-investment of the combined businesses. See “—Non-GAAP Financial Measures” below for further information relating to the Company’s adjusted EBITDA measure, including a reconciliation to GAAP net income.

The Company’s total adjusted EBITDA was $32.2 million in the three months ended June 30, 2015, compared with total adjusted EBITDA of $11.4 million in the three months ended June 30, 2014. The primary driver of the increase in total adjusted EBITDA was the gain on sale of PFG. The primary driver of the increase in adjusted EBITDA for continuing operations was the incorporation of Fortegra’s adjusted EBITDA of $9.2 million for the second quarter of 2015. Adjusted EBITDA for the period eliminates the impact of purchase accounting adjustments at Fortegra and increased depreciation and amortization expenses incurred in the second quarter of 2015 due to the expansion of the real estate segment’s joint venture activities.

For the six months ended June 30, 2015, the Company reported after tax net income of $17.8 million compared with after tax net income of $7.6 million in the comparable period in 2014. The key drivers of the change in net income were the gain on sale of the Company’s PFG subsidiary and the incorporation of Fortegra’s pre-tax earnings of $10.3 million for the first half of 2015. Revenues were $187.2 million in the first half of 2015, compared with $20.5 million in the first six months of 2014, an increase of $166.7 million. Expenses increased to $197.3 million in the first six months of 2015 from $29.8 million in the same period in 2014, an increase of $167.5 million. The significant change in revenues was predominantly due to the same factors as for the three months ended June 30, 2015, primarily the incorporation of Fortegra’s revenues for the first half of 2015 and an increase in rental income from Care’s expanded property portfolio. The increase in expenses in 2015 included increased amortization due to the impact of purchase accounting on Fortegra’s results, and increased interest, payroll, depreciation and other expenses

Page 3


related to the ongoing expansion of the Company’s real estate investment activities. Discussion of the changes in revenues, expenses and net income is presented below and in more detail, in our segment analysis.

The Company’s total adjusted EBITDA was $45.2 million in the six months ended June 30, 2015, compared with total adjusted EBITDA of $21.9 million in the six months ended June 30, 2014. The primary driver of the increase in total adjusted EBITDA was the gain on sale of PFG. The primary driver of the increase in adjusted EBITDA for continuing operations was the incorporation of Fortegra’s results for the first half of 2015 of $17.5 million. Adjusted EBITDA for the period incorporates the same adjustments as those in the second quarter of 2015.

Segment Results - Three months ended June 30, 2015 and June 30, 2014
($ in thousands)
Three months ended June 30, 2015 and the three months ended June 30, 2014
 
Insurance and insurance services
 
Specialty finance
 
Real estate
 
Asset management
 
Corporate and other
 
Totals
 
Three months ended June 30,
 
Three months ended June 30,
 
Three months ended June 30,
 
Three months ended June 30,
 
Three months ended June 30,
 
Three months ended June 30,
 
2015
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
Net realized and unrealized gains (losses) on investments
$
5

 
$
(195
)
$
148

 
$
369

$
(415
)
 
$
—

$
—

 
$
264

$
238

 
$
443

$
(29
)
Net realized and unrealized gains on mortgage pipeline and associated hedging instruments
—

 
368

105

 
—

—

 
—

—

 
—

—

 
368

105

Interest income
687

 
1,822

766

 
25

682

 
—

—

 
333

1,736

 
2,867

3,184

Service and administrative fees
25,545

 
—

—

 
—

—

 
—

—

 
—

—

 
25,545

—

Ceding commissions
10,148

 
—

—

 
—

—

 
—

—

 
—

—

 
10,148

—

Earned premiums, net
39,707

 
—

—

 
—

—

 
—

—

 
—

—

 
39,707

—

Gain on sale of loans held for sale, net
—

 
4,005

1,759

 
—

—

 
—

—

 
—

—

 
4,005

1,759

Loan fee income
—

 
1,882

980

 
—

—

 
—

—

 
—

—

 
1,882

980

Rental revenue
—

 
7

7

 
11,184

4,376

 
—

—

 
—

—

 
11,191

4,383

Other income
2,429

 
91

91

 
772

192

 
38

64

 
(307
)
(1,089
)
 
3,023

(742
)
Total revenue
78,521

 
7,980

3,856

 
12,350

4,835

 
38

64

 
290

885

 
99,179

9,640

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
1,775

 
834

311

 
1,810

978

 
—

—

 
1,775

1,354

 
6,194

2,643

Payroll and employee commissions
9,678

 
4,520

2,799

 
4,129

1,716

 
264

324

 
4,838

2,458

 
23,429

7,297

Commission expense
23,927

 
—

—

 
—

—

 
—

—

 
—

—

 
23,927

—

Member benefit claims
8,240

 
—

—

 
—

—

 
—

—

 
—

—

 
8,240

—

Net losses and loss adjustment expenses
12,926

 
—

—

 
—

—

 
—

—

 
—

—

 
12,926

—

Depreciation and amortization expenses
7,258

 
124

127

 
3,945

1,535

 
—

—

 
32

—

 
11,359

1,662

Other expenses
8,417

 
1,934

1,240

 
4,435

1,357

 
175

173

 
1,639

1,583

 
16,600

4,353

Total expense
72,221

 
7,412

4,477

 
14,319

5,586

 
439

497

 
8,284

5,395

 
102,675

15,955

Net intersegment revenue/(expense)
—

 
—

(110
)
 
—

—

 
—

—

 
—

110

 
—

—

Net income attributable to consolidated CLOs
—

 
—

—

 
—

—

 
2,752

3,010

 
(836
)
4,061

 
1,916

7,071

Pre-tax income/(loss)
$
6,300

 
$
568

$
(731
)
 
$
(1,969
)
$
(751
)
 
$
2,351

$
2,577

 
$
(8,830
)
$
(339
)
 
$
(1,580
)
$
756

Less: Provision (benefit) for income taxes
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(371
)
(1,080
)
Discontinued operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
21,003

2,186

Net income before non-controlling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
19,794

$
4,022

Less: net income attributable to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4,832

1,983

Net income available to common stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
14,962

$
2,039

 
 
 
 
 
 
 
 
 
 
 
 




Page 4


Segment Results - Six months ended June 30, 2015 and June 30, 2014
($ in thousands)
Six months ended June 30, 2015
 
Insurance and insurance services
 
Specialty finance
 
Real estate
 
Asset management
 
Corporate and other
 
Totals
 
Six months ended June 30,
 
Six months ended June 30,
 
Six months ended June 30,
 
Six months ended June 30,
 
Six months ended June 30,
 
Six months ended June 30,
 
2015
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
Net realized and unrealized gains (losses) on investments
$
—

 
$
307

$
115

 
$
(116
)
$
(724
)
 
$
—

$
—

 
$
31

$
1,484

 
$
222

$
875

Net realized and unrealized gains on mortgage pipeline and associated hedging instruments
—

 
719

190

 
—

—

 
—

—

 
—

—

 
719

190

Interest income
1,399

 
3,175

1,220

 
44

1,365

 
—

—

 
545

4,591

 
5,163

7,176

Service and administrative fees
47,472

 
—

—

 
—

—

 
—

—

 
—

—

 
47,472

—

Ceding commissions
20,085

 
—

—

 
—

—

 
—

—

 
—

—

 
20,085

—

Earned premiums, net
77,060

 
—

—

 
—

—

 
—

—

 
—

—

 
77,060

—

Gain on sale of loans held for sale, net
—

 
6,598

2,734

 
—

—

 
—

—

 
—

—

 
6,598

2,734

Loan fee income
—

 
3,281

1,409

 
—

—

 
—

—

 
—

—

 
3,281

1,409

Rental revenue
—

 
24

17

 
20,536

8,822

 
—

—

 
—

—

 
20,560

8,839

Other income
4,884

 
131

92

 
1,310

386

 
101

158

 
(397
)
(1,353
)
 
6,029

(717
)
Total revenue
150,900

 
14,235

5,777

 
21,774

9,849

 
101

158

 
179

4,722

 
187,189

20,506

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
3,514

 
1,345

455

 
3,140

1,956

 
—

—

 
3,324

3,046

 
11,323

5,457

Payroll and employee commissions
20,083

 
8,244

4,392

 
8,052

3,514

 
812

1,030

 
6,579

4,076

 
43,770

13,012

Commission expense
40,455

 
—

—

 
—

—

 
—

—

 
—

—

 
40,455

—

Member benefit claims
15,819

 
—

—

 
—

—

 
—

—

 
—

—

 
15,819

—

Net losses and loss adjustment expenses
25,376

 
—

—

 
—

—

 
—

—

 
—

—

 
25,376

—

Depreciation and amortization expenses
19,212

 
246

237

 
7,333

3,093

 
—

—

 
32

—

 
26,823

3,330

Other expenses
16,115

 
3,397

1,972

 
9,399

2,801

 
337

363

 
4,473

2,869

 
33,721

8,005

Total expense
140,574

 
13,232

7,056

 
27,924

11,364

 
1,149

1,393

 
14,408

9,991

 
197,287

29,804

Net intersegment revenue/(expense)
—

 
—

(188
)
 
—

—

 
—

—

 
—

188

 
—

—

Net income attributable to consolidated CLOs
—

 
—

—

 
—

—

 
5,573

6,131

 
(2,915
)
5,583

 
2,658

11,714

Pre-tax income (loss)
$
10,326

 
$
1,003

$
(1,467
)
 
$
(6,150
)
$
(1,515
)
 
$
4,525

$
4,896

 
$
(17,144
)
$
502

 
$
(7,440
)
$
2,416

Less: Provision (benefit) for income taxes
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,867
)
(1,732
)
Discontinued operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
23,348

3,476

Net income before non-controlling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
17,775

$
7,624

Less: net (loss) attributable to noncontrolling interests from continuing operations and discontinued operations - Tiptree Financial Partners, L.P.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3,875

4,551

Less: net (loss) income attributable to noncontrolling interests from continuing operations and discontinued operations - Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(83
)
(592
)
Less: net income attributable to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3,792

3,959

Net income available to common stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
13,983

$
3,665

Segment Assets as of - June 30, 2015 and December 31, 2014
($ in thousands)
Insurance and insurance services
 
Specialty finance
 
Real estate
 
Asset management
 
Corporate and other
 
Totals
 
June 30, 2015
December 31, 2014
 
June 30, 2015
December 31, 2014
 
June 30, 2015
December 31, 2014
 
June 30, 2015
December 31, 2014
 
June 30, 2015
December 31, 2014
 
June 30, 2015
December 31, 2014
Segment assets
$
840,262

$
767,914

 
$
123,636

$
79,075

 
$
240,247

$
179,822

 
$
2,782

$
2,871

 
$
282,186

$
65,570

 
$
1,489,113

$
1,095,252

Assets of consolidated CLOs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,883,030

1,978,094

Assets held for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

5,129,745

Total assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
3,372,143

$
8,203,091

 
 
 
 
 
 
 
 
 
 
 
 
EBITDA and Adjusted EBITDA are non-GAAP financial measures. Management believes that adjusted EBITDA provides a supplementary metric to enhance investors’ understanding of the ongoing growth potential of the Company’s businesses and an indication of the cash available for re-investment of the businesses. EBITDA and Adjusted EBITDA are not a measurement of financial performance or liquidity under GAAP; therefore, EBITDA and Adjusted EBITDA should not be considered as an alternative or substitute for GAAP.

Page 5



Summary segment EBITDA and Adjusted EBITDA for the three months periods ended June 30, 2015 and June 30, 20141 (Unaudited)
($ in thousands)
Three months ended June 30, 2015 and the three months ended June 30, 2014
 
Insurance and insurance services
 
Specialty finance
 
Real estate
 
Asset management
 
Corporate and other
 
Totals
 
Three months ended June 30,
 
Three months ended June 30,
 
Three months ended June 30,
 
Three months ended June 30,
 
Three months ended June 30,
 
Three months ended June 30,
 
2015
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
Segment EBITDA
$
15,333

 
$
1,526

$
(293
)
 
$
3,786

$
1,762

 
$
2,351

$
2,577

 
$
(7,023
)
$
1,015

 
$
15,973

$
5,061

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment Adjusted EBITDA
$
9,215

 
$
692

$
(604
)
 
$
2,040

$
784

 
$
2,351

$
2,577

 
$
(7,106
)
$
1,015

 
$
7,192

$
3,772


Summary segment EBITDA and Adjusted EBITDA for the six months periods ended June 30, 2015 and June 30, 20141 (Unaudited)
($ in thousands)
Six months ended June 30, 2015
 
Insurance and insurance services
 
Specialty finance
 
Real estate
 
Asset management
 
Corporate and other
 
Totals
 
Six months ended June 30,
 
Six months ended June 30,
 
Six months ended June 30,
 
Six months ended June 30,
 
Six months ended June 30,
 
Six months ended June 30,
 
2015
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
Segment EBITDA
$
33,052

 
$
2,594

$
(775
)
 
$
4,323

$
3,534

 
$
4,525

$
4,896

 
$
(13,788
)
$
3,548

 
$
30,706

$
11,203

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment Adjusted EBITDA
$
17,451

 
$
1,249

$
(1,230
)
 
$
2,659

$
1,578

 
$
4,525

$
4,896

 
$
(13,871
)
$
3,021

 
$
12,013

$
8,265

1 For further information relating to the Company’s Adjusted EBITDA, including a reconciliation to GAAP net income, see“—Non-GAAP Financial Measures” below.

Insurance and Insurance Services segment - operating results for three and six months ended June 30, 2015
 
Insurance and Insurance Services segment
($ in thousands)
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2015
Net realized and unrealized gains (losses) on investments
$
5

 
$
—

Interest income
687

 
1,399

Service and administrative fees
25,545

 
47,472

Ceding commissions
10,148

 
20,085

Earned premiums, net
39,707

 
77,060

Other income
2,429

 
4,884

Total revenue
$
78,521

 
$
150,900

 
 
 
 
Interest expense
$
1,775

 
$
3,514

Payroll and employee commissions
9,678

 
20,083

Commission expense
23,927

 
40,455

Member benefit claims
8,240

 
15,819

Net losses and loss adjustment expenses
12,926

 
25,376

Depreciation and amortization expenses
7,258

 
19,212

Other expenses
8,417

 
16,115

Total expense
72,221

 
140,574

Pre-tax income
$
6,300

 
$
10,326



Page 6


Insurance and Insurance Services segment

The Company’s insurance and insurance services segment is comprised of its wholly-owned Fortegra subsidiary, which was acquired in December 2014. Accordingly, there are no comparable revenues or expenses reported for the three and six months ended June 30, 2014. In addition, the financial information for the three and six months ended June 30, 2014 previously reported in Fortegra’s filings with the SEC may not be comparable to financial information reported in this report due to purchase price accounting adjustments to Fortegra’s results giving effect to the push-down accounting treatment of Tiptree’s acquisition of Fortegra. These adjustments include setting deferred cost assets to a fair value of zero, modifying deferred revenue liabilities to their respective fair values, and recording a substantial intangible asset representing the value of the acquired insurance policies and contracts. The application of push-down accounting creates a modest impact to net income, but significantly impacts individual assets, liabilities, revenues, and expenses. In addition, Fortegra’s purchase of the remaining 37.6% of ProtectCELL in 2015 reduced the amount of net income attributable to non-controlling interests for the six months ended June 30, 2015 and thus had a positive impact on Fortegra’s net income. Results of the Company’s PFG subsidiary, which had previously been presented in the insurance and insurance services segment have been reclassified as discontinued operations for 2014 and 2015.

Insurance and insurance services segment pre-tax income was $10.3 million for the first half of 2015. Pre-tax income increased from $4.0 million in the first quarter of 2015 to $6.3 million in the second quarter of 2015. Revenues were $78.5 million in the second quarter, compared with $72.4 million in the first quarter. The quarter over quarter net increase of $6.1 million in revenues was principally driven by increases in service and administrative fees of $3.6 million and earned premiums of $2.3 million. The quarter over quarter improvement in revenues was largely attributable to strong sales of credit and warranty insurance products partially offset by competitive pressure in mobile device protection plans and motor club memberships resulting in reduced contract volumes in those two product lines.

For insurance and insurance services, the main components of revenue are service and administrative fees, ceding commissions and earned premiums, net. While the sale of cell phone warranty contracts have been dampened by competitive pressures, slowing growth in that area has been more than offset by growth in the sale of credit life insurance, warranty and specialty insurance products in the auto sector and for other consumer durables.

Service and administrative fees were $22.0 million for the first quarter of 2015, and $25.5 million in the second quarter, a 16% increase as a result of these factors. Ceding commissions were $9.9 million in the first quarter and $10.1 million in the second quarter. Ceding commissions are earned on credit insurance products. Fortegra’s clients typically retain underwriting risk related to the insurance products they offer to their customers through retrospective insurance arrangements or wholly-owned reinsurance subsidiaries. While the majority of Fortegra’s revenues are fee-based, the Company selectively assumes underwriting risk from time to time to meet client’s needs and enhance profitability. As a result of its risk retention activities, Fortegra generated earned premiums, net of $37.3 million in the first quarter and $39.7 million in the second quarter. Earned premiums, net are generated from the retained portion of Fortegra’s payment protection insurance policies sold in conjunction with the offering of consumer finance products by financial institution and retail clients with whom the Company typically has long standing relationships.

Segment expenses in the first half were $140.6 million. Expenses were $72.2 million in the second quarter, compared with $68.4 million in the first quarter. The quarter over quarter net increase of $3.8 million was principally driven by an increase in commission expenses of $7.4 million, partly offset by a reduction in depreciation and amortization expense of $4.8 million. The increase in commission expense largely resulted from increased sales in the second quarter. The reduction in depreciation and amortization expense was attributable to lower purchase price amortization charges in the second quarter.

Expenses in the insurance and insurance services segment are composed of payroll and employee commissions, commissions paid to brokers, member benefit claims, net losses and loss adjustment expense, depreciation and amortization expenses and other expenses.

Payroll and employee commissions expense are the largest component of our expense base and are composed of base salaries, employee commissions and accruals for employee paid time off and bonuses. Payroll and employee commission expense was $9.7 million for the second quarter and $20.1 million for the six months ending June 30, 2015.

Commissions expense is incurred on most of Fortegra’s revenue classes, most of which are retrospective commissions paid to distributors and retailers selling our products, including credit insurance policies, motor club memberships, mobile device protection and warranty service contracts. Credit insurance commission rates are, in many cases, set by state regulators and are also impacted by market conditions. Commission expense was $23.9 million for the second quarter and $40.5 million for the six months ended June 30, 2015, driven by the increase in policies issued quarter over quarter primarily in the credit life and specialty auto warranty and insurance products.


Page 7


Claims payments under Fortegra’s insurance and warranty service contracts take the form of two types. Member benefit claims represent the costs of services and replacement devices incurred in car club and warranty protection service contracts. Net losses and loss adjustment expenses represent actual insurance claims paid, changes in unpaid claim reserves, net of amounts ceded, and the costs of administering claims for Fortegra’s credit life and other insurance lines, such as non-standard auto. Incurred claims are impacted by loss frequency, which is a measure of the number of claims per unit of insured exposure, and loss severity, which is based on the average size of claims. Factors affecting loss frequency and loss severity include changes in claims reporting patterns, claims settlement patterns, judicial decisions, economic conditions, morbidity patterns and the attitudes of claimants towards settlements. Member benefits claims and net losses and loss adjustment expenses, combined were $21.2 million for the second quarter and $41.2 million for the six months ended June 30, 2015. The slight increase in the second quarter over the first quarter was a function of growth in earned premiums in credit life and non-standard auto, and increased motor club claims partially offset by lower claims in mobile devices.

Depreciation and amortization expense of $7.2 million for the second quarter and $19.2 million for the six months ended June 30, 2015 related primarily to the amortization of the intangible assets acquired as a result of Tiptree’s purchase of Fortegra. The most significant of these expenses is the amortization of the fair value attributed to the insurance policies and contracts acquired, which had a value of $36.5 million as of the acquisition date and which has a steep amortization curve. Amortization of this intangible asset was approximately $16.9 million in the first six months of 2015.

Fortegra’s other expenses primarily comprise lead acquisition, advertising and event costs, bank and credit card processing fees, technology expenses, filing and licensing fees, premium taxes and office rent costs. The combination of these expenses totaled $8.4 million for the second quarter and $16.1 million for the six months ended June 30, 2015. For further information relating to Fortegra’s debt and interest expenses, please refer to Note 15 - Debt, of the accompanying financial statements.

Specialty Finance segment - operating results for the three and six month periods ended June 30, 2015 and June 30, 2014.
 
Siena
 
Luxury
 
Specialty Finance
 
Three months ended June 30,
 
Three months ended June 30,
 
Three months ended June 30,
($ in thousands)
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Net realized and unrealized gains on investments
$
—

 
$
—

 
$
(195
)
 
$
148

 
$
(195
)
 
$
148

Net realized and unrealized gain on mortgage pipeline and associated hedging instruments
—

 
—

 
368

 
105

 
368

 
105

Interest income
1,364

 
279

 
458

 
487

 
1,822

 
766

Gain on sale of loans held for sale, net
—

 
—

 
4,005

 
1,759

 
4,005

 
1,759

Loan fee income
974

 
638

 
908

 
342

 
1,882

 
980

Rental revenue
—

 
—

 
7

 
7

 
7

 
7

Other income
28

 
91

 
63

 
—

 
91

 
91

Total revenue
2,366

 
1,008

 
5,614

 
2,848

 
7,980

 
3,856

 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
284

 
117

 
550

 
194

 
834

 
311

Payroll and employee commissions
1,088

 
572

 
3,432

 
2,227

 
4,520

 
2,799

Depreciation and amortization expenses
67

 
60

 
57

 
67

 
124

 
127

Other expenses
555

 
282

 
1,379

 
958

 
1,934

 
1,240

Total expense
1,994

 
1,031

 
5,418

 
3,446

 
7,412

 
4,477

Net intersegment revenue/(expense)
—

 
—

 
—

 
(110
)
 
—

 
(110
)
Pre-tax income (loss)
$
372

 
$
(23
)
 
$
196

 
$
(708
)
 
$
568

 
$
(731
)

Page 8


 
Siena
 
Luxury
 
Specialty Finance
 
Six months ended June 30,
 
Six months ended June 30,
 
Six months ended June 30,
($ in thousands)
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Net realized and unrealized gains on investments
$
—

 
$
—

 
$
307

 
$
115

 
$
307

 
$
115

Net realized and unrealized gain/(loss) on mortgage pipeline and associated hedging instruments
—

 
—

 
719

 
190

 
719

 
190

Interest income
2,390

 
615

 
785

 
605

 
3,175

 
1,220

Gain on sale of loans held for sale, net
—

 
—

 
6,598

 
2,734

 
6,598

 
2,734

Loan fee income
1,811

 
842

 
1,470

 
567

 
3,281

 
1,409

Rental revenue
—

 
—

 
24

 
17

 
24

 
17

Other income
68

 
92

 
63

 
—

 
131

 
92

Total revenue
4,269

 
1,549

 
9,966

 
4,228

 
14,235

 
5,777

 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
516

 
155

 
829

 
300

 
1,345

 
455

Payroll and employee commissions
1,990

 
888

 
6,254

 
3,504

 
8,244

 
4,392

Depreciation and amortization expenses
133

 
119

 
113

 
118

 
246

 
237

Other expenses
926

 
486

 
2,471

 
1,486

 
3,397

 
1,972

Total expense
3,565

 
1,648

 
9,667

 
5,408

 
13,232

 
7,056

Intersegment expense
—

 
—

 
—

 
(188
)
 
—

 
(188
)
Pre-tax income (loss)
$
704

 
$
(99
)
 
$
299

 
$
(1,368
)
 
$
1,003

 
$
(1,467
)
Specialty Finance segment

Our specialty finance segment is comprised of Siena, a commercial finance company, which is 62% owned by the Company and Luxury, a mortgage originator which is 67.5% owned by the Company. As described above in “—Overview—Subsequent Events,” the acquisition of Reliance, a retail mortgage originator, was completed in the third quarter of 2015, and this entity will be added to our specialty finance segment. Reliance’s funding volume in the first six months of 2015 totaled $389 million, while Luxury’s funding volume in the first six months of 2015 totaled $440 million.

Specialty Finance segment pre-tax income was $568 thousand for the three months ended June 30, 2015, compared with a pre-tax net loss of $731 thousand for the second quarter of 2014. For the six months ended June 30, 2015, the specialty finance segment pre-tax net income was $1.0 million, compared with a pre-tax net loss of $1.5 million for the prior year comparable period.

Segment revenues were $8.0 million for the second quarter of 2015, compared with $3.9 million for the second quarter of 2014, an increase of $4.1 million or 107%. Segment expenses were $7.4 million in the second quarter of 2015, compared with $4.5 million in the second quarter of 2014, an increase of $2.9 million or 66%.

Segment revenues were $14.2 million for the first half of 2015, compared with revenues of $5.8 million in the corresponding prior year period, an increase of $8.4 million or 146%. Segment expenses were $13.2 million in the six months ended June 30, 2015, compared with $7.1 million in the first half of 2014, an increase of $6.1 million or 88%. Second quarter and first half 2015 results for Siena and Luxury are discussed further below.

Siena

Siena earned pre-tax net income of $372 thousand for the second quarter of 2015, compared with a pre-tax net loss of $23 thousand for the second quarter of 2014. Siena earned net pre-tax income of $704 thousand in the first half of 2015 as compared to a net pre-tax loss of $99 thousand in of the same period in 2014. The improvement in Siena’s results in 2015 were primarily the result of a combination of new clients and increased lending activities and lifting the balance of average earning assets, which were $51.0 million for the first half of 2015, compared with $22.3 million for the first half of 2014, an increase of 129%. Siena’s revenues are primarily driven by interest income on the loans it makes to small and medium sized U.S. companies and fee income associated with the Company’s lending activities.


Page 9


Revenues earned by Siena totaled $2.4 million in the second quarter of 2015, compared with $1.0 million in the second quarter of 2014, an increase of $1.4 million or 135%. For the first half of 2015, Siena’s revenues were $4.3 million, compared with revenues of $1.5 million in the first half of 2014, an increase of $2.8 million or 176%. The increase in second quarter and first half revenue year over year was primarily driven by the increase in lending volume.

Siena’s expenses were $2.0 million in the second quarter of 2015, compared with $1.0 million in the second quarter of 2014, an increase of $1.0 million or 93%. Siena’s expenses were $3.6 million in the first half of 2015, compared with $1.6 million in the first half of 2014, an increase of $2.0 million or 116%. Siena’s expenses are comprised primarily of interest expense on the Company’s borrowings, payroll and employee commissions and other expenses. Growth in expenses were in line with the overall increase in lending volume and were partially driven by the relocation of corporate headquarters to accommodate Siena’s growth.

Luxury

Luxury earned pre-tax net income of $196 thousand for the second quarter of 2015, compared with a pre-tax net loss of $598 thousand in the second quarter of 2014, an increase of $794 thousand. Luxury earned net pre-tax income of $299 thousand for the first half of 2015, compared with a net pre-tax loss of $1.4 million for the first half of 2014. The improvement in results were primarily driven by a year over year 80% increase in mortgage origination volume from $244 million in the first half of 2014 to $440 million in the first half of 2015.

Luxury’s revenues for the second quarter of 2015 were $5.6 million compared with $2.8 million for the second quarter of 2014, an increase of $2.8 million or 97%. Luxury’s revenues for the first half of 2015 were $10.0 million, a 136% year over year increase over the $4.2 million in the prior year period. The revenue improvement was driven by higher funding volume. Revenues earned by Luxury are comprised of gain on sale on mortgages originated and sold to investors, gains and losses on Luxury’s mortgage pipeline of interest rate lock commitments and mortgage loans held for sale and the associated hedges, interest income on mortgages held for sale, and fees associated with Luxury’s mortgage origination business. Luxury’s loan fees primarily comprised loan application fees, appraisal fees, document preparation fees, broker fees earned and loan underwriting fees.

Luxury’s expenses for the second quarter of 2015 were $5.4 million compared with $3.4 million for the second quarter of 2014, an increase of $2.0 million or 57%. Total expenses for the six months ended June 30, 2105 were $9.7 million, up 79% from the year earlier period. Luxury’s expenses are composed of interest expense on the borrowings primarily used to finance mortgages held for sale, payroll and employee commissions and other expenses. As the mortgage origination business is highly scalable, expenses generally increase at a slower pace relative to increases in revenues. As a result, expenses were up generally in line with the improvements in funding volume, driving improved profitability. The primary driver of higher expenses was higher personnel costs as the result of increased volumes.

Real Estate segment - operating results for the three and six month periods ended June 30, 2015 and June 30, 2014.
 
Real Estate segment
 
Three months ended June 30,
 
Six months ended June 30,
($ in thousands)
2015
 
2014
 
2015
 
2014
Net realized and unrealized gains (losses) on investments
$
369

 
$
(415
)
 
$
(116
)
 
$
(724
)
Interest income
25

 
682

 
44

 
1,365

Rental revenue
11,184

 
4,376

 
20,536

 
8,822

Other income
772

 
192

 
1,310

 
386

Total revenue
12,350

 
4,835

 
21,774

 
9,849

 
 
 
 
 
 
 
 
Interest expense
1,810

 
978

 
3,140

 
1,956

Payroll and employee commissions
4,129

 
1,716

 
8,052

 
3,514

Depreciation and amortization expenses
3,945

 
1,535

 
7,333

 
3,093

Other expenses
4,435

 
1,357

 
9,399

 
2,801

Total expense
14,319

 
5,586

 
27,924

 
11,364

Pre-tax income (loss)
$
(1,969
)
 
$
(751
)
 
$
(6,150
)
 
$
(1,515
)


Page 10


Real Estate segment

The Company’s real estate segment consists of its wholly-owned Care subsidiary, which primarily acquires and owns seniors housing properties. As of June 30, 2015, Care’s portfolio consists of 24 properties across 9 states primarily in the Mid-Atlantic and Southern United States. Care’s portfolio is comprised of 5 triple net lease properties, 13 joint venture properties and 6 hybrid triple net lease properties. Hybrid triple net lease are properties where Care owns the real estate and the operator owns the operating company, with the operator paying a contractual annual minimum rent and Care and the operator both sharing in the property’s net operating income based on agreed metrics.

Care had a pre-tax net loss of $2.0 million for the second quarter of 2015, compared with a pre-tax net loss of $751 thousand in the second quarter of 2014. Care had a pre-tax loss of $6.2 million in the first half of 2015, compared with pre-tax loss of $1.5 million in the first half of 2014. Care made significant investments in senior housing properties and joint ventures during 2014 and the first quarter of 2015. The increase in the number of properties generated higher rental and other income in the first half of 2015, but the Company also incurred additional depreciation and amortization expenses as a consequence of the expansion in Care’s business.

Care had Adjusted EBITDA of $2.0 million for the second quarter of 2015 compared to $784 thousand in the comparable period of 2014 and $2.7 million of Adjusted EBITDA for the first half of 2015 compared to $1.6 million in the comparable period in 2014. See “—Non-GAAP Financial Measures” below for a reconciliation to GAAP net income.

Care’s revenues were $12.4 million for the second quarter of 2015, compared with $4.8 million for the second quarter of 2014, an increase of $7.6 million or 155%. Care’s revenues increased significantly to $21.8 million in the first half of 2015, compared with $9.8 million in the first half of 2014, an increase of 121%. Rental income in the first half of 2015 was $20.5 million, compared with rental income of $8.8 million in the first half of 2014. Care earned other income of $1.3 million in the first half of 2015, compared to other income of $386 thousand in the first half of 2014. Other income in the first half of 2015 was comprised of resident fees of $985 thousand and reimbursable escrow earnings of $325 thousand. In the first half of 2014, resident fees were $131 thousand and reimbursable escrow earnings were $255 thousand. The increase in rental revenue and other income is mainly due to new joint ventures, including the Royal joint venture which was established in the first quarter of 2015 and the Greenfield and Belle Reve joint ventures which were established in the fourth quarter of 2014.

Care’s net losses on investments of $116 thousand and $724 thousand in the first half of 2015 and the first half of 2014, respectively, primarily consist of unrealized losses on interest rate swaps undertaken to mitigate Care’s interest rate risk. Care earned interest income of $44 thousand in the first half of 2015, compared to interest income of $1.4 million in the first half of 2014. The decline in interest income in 2015 was attributable to the repayment of the Westside loan in the third quarter of 2014.

Care’s expenses for the second quarter of 2015 were $14.3 million compared with $5.6 million for the second quarter of 2014, an increase of $8.7 million or 156%. Care’s expenses increased to $27.9 million in the first half of 2015, compared with $11.4 million in the second quarter of 2014, an increase of 146%. Care’s expenses are comprised of interest expenses on Care’s borrowings, payroll expenses (including employees of Care’s joint ventures), professional fees, depreciation and amortization of properties and leases acquired and other expenses. Interest expense was $3.1 million for the first half of 2015, compared with $2.0 million for the first half of 2014. Payroll expenses were $8.1 million for the first half of 2015 compared with $3.5 million for the first half of 2014. Depreciation and amortization expenses were $7.3 million in the first half of 2015, compared with $3.1 million in the first half of 2014. Care’s other expenses, which include property operating expenses, office expenses, property acquisition costs, professional fees and property taxes, were $9.4 million for the first half of 2015, compared with $2.8 million for the first half of 2014. The increase in expenses was attributable to increased operating costs associated with the larger property portfolio and an increase in amortization of in-place leases acquired.


Page 11


Asset Management segment - operating results for the three and six month periods ended June 30, 2015 and June 30, 2014.
($ in thousands)
Asset Management segment
 
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Fees earned from CLOs under management
$
2,752

 
$
3,010

 
$
5,573

 
$
6,131

Other management fee income
38

 
64

 
101

 
158

Total revenue
2,790

 
3,074

 
5,674

 
6,289

 
 
 
 
 
 
 
 
Payroll and employee commissions
264

 
324

 
812

 
1,030

Other expenses
175

 
173

 
337

 
363

Total expense
439

 
497

 
1,149

 
1,393

 
 
 
 
 
 
 
 
Pre-tax income
$
2,351

 
$
2,577

 
$
4,525

 
$
4,896


Asset Management segment

The Company’s asset management segment generates fee income from the CLOs under management and from its management of NPPF 1, a portfolio of tax-exempt securities owned by third-party investors. Total assets under management (“AUM”) of our asset management segment were $1.91 billion as of June 30, 2015, compared to $1.77 billion as of June 30, 2014, of which $1.76 billion was attributable to the CLO business and $153.3 million was attributable to NPPF1 as of June 30, 2015 and $1.59 billion was attributable to the CLO business and $183.4 million was attributable to NPPF1 as of June 30, 2014. The Company added $730.0 million of AUM in 2014 by launching Telos 5 and Telos 6 but that amount was offset by a decline in $223.2 million of AUM as Telos 1 and Telos 2 returned principal to noteholders since they were past their reinvestment period, and a decline in AUM of NPPF1 of $37.7 million which is in run-off. For a review of the inter-segment allocation of revenues from CLOs under management, please refer to “—Net Income attributable to CLOs managed by the Company - for the three and six month periods ended June 30, 2015 and June 30, 2014” below. Other management fee income in the table above represents the fees earned from the management of the NPPF 1 portfolio by our Muni Capital Management subsidiary.

Pre-tax net income for the asset management segment was $2.4 million for the second quarter of 2015, compared with pre-tax net income of $2.6 million for the second quarter of 2014, a decline of $0.2 million or 9%. Pretax net income for the first half of 2015 was $4.5 million, as compared to $4.9 million in the prior year period. The principal reason for the decline was the reduction in CLO management fees, driven by a combination of amortized AUM and lower fees as described below.

CLO asset management fees totaled $5.6 million in the first half of 2015, compared to $6.1 million in the first half of 2014. Although the number of CLOs under management increased from five CLOs as of June 30, 2014 to six CLOs as of June 30, 2015, management fee income declined between 2014 and 2015. The decrease was due principally to the reduction in management fees earned on Telos 1 and Telos 2, whose assets are declining, generally resulting in reduced management fees. Fees on Telos 5 and Telos 6, both new in 2014, were earned at a lower rate than the fees generated from Telos 1 and Telos 2, which had been issued in 2006 and 2007.

Expenses for the Asset management segment were $1.1 million for the first half of 2015, compared with $1.4 million for the first half of 2014. The decline is largely due to a reduction in staffing numbers at Muni Capital Management.

Net Income attributable to CLOs managed by the Company - for the three and six month periods ended June 30, 2015 and June 30, 2014.

The Company earns revenues from CLOs under management. These revenues comprise fees earned for managing the CLOs, distributions received from the Company’s holdings of subordinated notes issued by the CLOs and realized and unrealized gains and losses from the Company’s holdings of subordinated notes. The management fees earned from the CLOs are incorporated in the Asset Management segment, while distributions earned and gains and losses on the Company’s holdings of subordinated notes issued by the CLOs are incorporated in the Company’s corporate and other segment.


Page 12


($ in thousands)
Net Income attributable to CLOs managed by the Company
 
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Management fees paid by the CLOs to the Company
$
2,752

 
$
3,010

 
$
5,573

 
$
6,131

Distributions from the subordinated notes held by the Company
3,230

 
3,534

 
8,956

 
7,359

Realized and unrealized (losses) gains on subordinated notes held by the Company
(4,066
)
 
527

 
(11,871
)
 
(1,776
)
Net income attributable to the consolidated CLOs
$
1,916

 
$
7,071

 
$
2,658

 
$
11,714


Pre-tax net income from the Company’s CLO business was $1.9 million for the second quarter of 2015, compared with net pre-tax net income of $7.1 million in the second quarter of 2014. Pretax net income attributable to consolidated CLOs was $2.7 million in the first half of 2015 versus $11.7 million in the prior year period. The primary drivers of the decline in 2015 was attributable to realized and unrealized losses incurred on the Company’s holdings of CLO subordinated notes in the second quarter of 2015. The Company sold its holdings of subordinated notes issued by Telos 2 and Telos 4 during the second quarter of 2015. The sale generated net cash proceeds of $39.7 million, but also had the effect of reducing the total amount of distributions earned from holdings of subordinated notes in the second quarter of 2015. The sale also generated tax losses of approximately $12.5 million to the Company.

Corporate and Other segment - operating results for the three and six month periods ended June 30, 2015 and June 30, 2014.
($ in thousands)
Corporate and Other segment
 
 CLO subordinated notes and tax exempt securities
 
Credit investments
 
Corporate
 
Total
 
Three months ended June 30,
 
Three months ended June 30,
 
Three months ended June 30,
 
Three months ended June 30,
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
Net realized and unrealized gains (losses) on investments
$
(297
)
$
961

 
$
189

$
(875
)
 
$
372

$
152

 
$
264

$
238

Interest income
141

425

 
174

1,097

 
18

214

 
333

1,736

Other income
—

—

 
—

—

 
(307
)
(1,089
)
 
(307
)
(1,089
)
Total revenue
(156
)
1,386

 
363

222

 
83

(723
)
 
290

885

 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
—

—

 
83

—

 
1,692

1,354

 
1,775

1,354

Payroll and employee commissions
76

92

 
—

—

 
4,762

2,366

 
4,838

2,458

Depreciation and amortization expenses
—

—

 
—

—

 
32

—

 
32

—

Other expenses
57

60

 
215

—

 
1,367

1,523

 
1,639

1,583

Total expense
133

152

 
298

—

 
7,853

5,243

 
8,284

5,395

 Intersegment revenue
—

—

 
—

—

 
—

110

 
—

110

Distributions received and realized and unrealized gains and losses on the subordinated notes, net
(836
)
4,061

 
—

—

 
—

—

 
(836
)
4,061

Pre-tax (loss) income
$
(1,125
)
$
5,295


$
65

$
222


$
(7,770
)
$
(5,856
)

$
(8,830
)
$
(339
)

($ in thousands)
Corporate and other segment
 
 CLO subordinated notes and tax exempt securities
 
Credit investments
 
Corporate
 
Total
 
Six months ended June 30,
 
Six months ended June 30,
 
Six months ended June 30,
 
Six months ended June 30,
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
Net realized and unrealized gains (losses) on investments
$
55

$
1,928

 
$
189

$
(709
)
 
$
(213
)
$
265

 
$
31

$
1,484

Interest income
310

861

 
174

3,303

 
61

427

 
545

4,591

Other income
—

—

 
—

—

 
(397
)
(1,353
)
 
(397
)
(1,353
)

Page 13


($ in thousands)
Corporate and other segment
 
 CLO subordinated notes and tax exempt securities
 
Credit investments
 
Corporate
 
Total
Total revenue
365

2,789

 
363

2,594

 
(549
)
(661
)
 
179

4,722

 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
—

—

 
83

527

 
3,241

2,519

 
3,324

3,046

Payroll and employee commissions
109

174

 
—

—

 
6,470

3,902

 
6,579

4,076

Depreciation and amortization expenses
—

—

 
—

—

 
32

—

 
32

—

Other expenses
116

145

 
215

—

 
4,142

2,724

 
4,473

2,869

Total expense
225

319

 
298

527

 
13,885

9,145

 
14,408

9,991

 Intersegment revenue
—

—

 
—

—

 
—

188

 
—

188

Distributions received and realized and unrealized gains and losses on the subordinated notes, net
(2,915
)
5,583

 
—

—

 
—

—

 
(2,915
)
5,583

Pre-tax (loss)income
$
(2,775
)
$
8,053


$
65

$
2,067


$
(14,434
)
$
(9,618
)

$
(17,144
)
$
502


Corporate and other segment

The Company’s corporate and other segment incorporates revenues from the Company’s investments in CLOs and tax exempt securities, income from the Company’s credit investment portfolio and net gains or losses from the Company’s corporate finance activity, including the interest rate and credit derivative risk mitigation transactions. Segment expenses include interest expense on the Fortress credit facility and head office payroll and other expenses.

The Company’s CLO subordinated notes and tax exempt security portfolio comprises holdings of subordinated notes and related participations in management fees issued primarily by CLOs managed by the Company (“CLO holdings”), together with the Company’s tax-exempt security holdings. As of June 30, 2015 and December 31, 2014, the Company’s CLO holdings, at fair value, were $42.7 million and $94.3 million respectively. In the first half of 2015, the Company incurred a net loss of $2.9 million on its CLO holdings, which comprised net distributions received of $9.0 million and realized and unrealized net losses of $11.9 million. During the second quarter of 2015, the Company sold its holdings of CLO subordinated notes issued by Telos 2 and Telos 4 for total net proceeds of $39.7 million, and realized a total cumulative loss of $22.0 million, of which a net total of $8.0 million was recognized in the first half of 2015. The total cumulative realized loss on the CLO subordinated notes sold was offset by total cumulative distributions of $94.3 million received by the Company over the period the subordinated notes were held, of which $3.2 million was earned in 2015.

As of June 30, 2015 and December 31, 2014, the Company held investments at fair value of $10.1 million and $13.2 million, respectively, in portfolios of tax-exempt securities managed by the Company. In the first half of 2015, the Company earned realized and unrealized gains of $55 thousand on these portfolios, compared with $1.9 million in the first half of 2014. Interest income earned from these portfolios was $310 thousand in the first half of 2015, compared to $861 thousand in the first half of 2014. The decline in interest income and realized and unrealized gains were due to the reduced size of the portfolios in 2015.

The Company’s credit portfolio comprises its loan warehouse, investments in non-performing mortgage loans and its credit opportunity strategy. In 2014, the Company had established loan warehouse credit facilities which were designed to hold loans until new CLOs could be formed. The warehouse facilities generated net income of $2.1 million in the first half of 2014. The warehouse facilities were terminated as CLOs were issued during the course of 2014 and consequently no income was earned or expenses incurred in the first half of 2015. However, as noted in the subsequent events section of this discussion, the Company established a warehouse line in the third quarter of 2015 to purchase loans in anticipation of the subsequent launch of a new CLO.

The Company commenced its non-performing loan strategy during the second quarter of 2015 with the investment of $9.7 million in the second quarter in a pool of non-performing mortgage loans secured by residential properties. The mortgage loans were purchased at a discount to their unpaid principal balances and the estimated value of the underlying properties. The goal of the strategy is to earn a return on the investment through a restructuring and subsequent reselling the mortgage at a gain or through foreclosure on the property and selling the property at a gain. The Company incurred a minimal loss from its non-performing loan strategy in the second quarter of 2015, primarily due to professional expenses incurred in establishing the strategy.


Page 14


The Company also commenced its credit opportunities strategy during the second quarter of 2015 with the purchase of a pool of loans to middle-market borrowers. The Company has leveraged its principal investment with a secured credit agreement. As of June 30, 2015 the Company had invested $25 million in the strategy and borrowed $9.4 million under the financing facility for settled purchases of loans totaling $34.4 million. Under the terms of the financing agreement, the Company bears the first loss on any defaults in the pool of loans. Net income from the credit opportunities strategy was $160 thousand for the second quarter of 2015.

Corporate revenues comprise net realized and unrealized gains and losses on the Company’s credit mitigation transactions, income from the Company’s investments in Star Asia entities and other Corporate investments.

The Company has entered into an interest rate hedge to mitigate the potential negative impact of a general rise in interest rates. The Company has also entered into a credit derivative swap and CDX derivative index positions, buying and selling credit protection on different tranches of risk in differing CDX indices. The credit swap and CDX transactions are designed to mitigate the potential impact of a general deterioration in corporate credit risk. The total net loss on these risk mitigation transactions was $690 thousand in the first half of 2015, compared with total net loss of $2.5 million in the first half of 2014.

Corporate revenues include income from the Company’s investments in the Star Asia Entities. The Star Asia Entities are Tokyo-based real estate holding companies formed to invest in Asian properties and real estate related debt instruments. The Company incurred an unrealized loss of $63 thousand on these investments in the first half of 2015, compared to unrealized gains of $680 thousand in the first half of 2014 from its investments in these entities. During the second quarter of 2015, the Company invested $4.8 million in a rights offering from Star Asia Finance Ltd.

Net revenues from other Corporate investments were $2 thousand in the first half of 2015, compared with net revenues of $931 thousand in the first half of 2014. The decline was primarily the result of unrealized losses on investments of $196 thousand in the first half of 2015, compared with net unrealized gains of $336 thousand in the first half of 2014.

Corporate and other segment interest expense was $3.3 million in the first half of 2015, compared to $3.0 million in the first half of 2014. This interest expense is primarily interest on borrowings under the Company’s credit agreement with Fortress. Interest expense incurred on the Company’s borrowings under the Fortress line of credit was $3.0 million in the first half of 2015, compared to $2.3 million in the first half of 2014. Further details of the Company’s borrowings under the Fortress credit agreement are provided in Note 15-Debt, in the accompanying consolidated financial statements.

Corporate and other segment operating expenses include payroll, professional fees and other expenses. Payroll expenses, which include salaries, bonuses and benefits totaled $6.6 million in the first half of 2015, compared to $4.1 million in the first half of 2014. Corporate payroll expense includes the expense of head office management, legal and accounting staff as well as the payroll expense associated with the management of the Company’s tax exempt portfolio. Payroll expenses increased in 2015 as the Company expanded its staff to match the increased scope of its activities.

Other expenses were $4.5 million in the first half of 2015 and $2.9 million in the first half of 2014. The other expenses primarily consisted of professional fees, insurance, shareholder support, office rent and other office costs and travel expenses. Other expenses increased in 2015 as a result of the general expansion in the Company’s business activities.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes

Tiptree Financial had a total tax benefit from continuing operations of $371 thousand in the second quarter of 2015 as compared to a tax benefit of $1.1 million in the same period of 2014. The effective tax rate on income from continuing operations for the quarter ended June 30, 2015 was approximately 45.3% compared to 22.3% for the prior year period (which does not bear a customary relationship to statutory income tax rates). Differences from the statutory income tax rates are primarily the result of: (i) taxes incurred at certain corporate subsidiaries that do not consolidate with our taxable income, (ii) non-deductible transaction costs incurred on the Fortegra transaction, (iii) the effect of changes in valuation allowance on net operating losses reported by Tiptree Financial, Siena, Luxury, and MFCA, and (iv) the effect of state income taxes incurred on a separate legal entity basis.

For the first half of 2015, Tiptree Financial had a tax benefit from continuing operations of $1.9 million, compared with a tax benefit of $1.7 million in the first half of 2014. The key driver of the 2015 tax benefit is due to $12.5 million of realized CLO losses, while the key driver of the tax benefit in 2014 was due to losses in our Luxury subsidiary.

Page 15



Discontinued operations, net

The Company completed its sale of PFG during the second quarter of 2015. Net income from PFG discontinued operations was $23.3 million in the first half of 2015, which includes the net gain on the sale of PFG of $16.3 million after provision for taxes. As such, income from discontinued operations was $7.0 million, excluding the gain on the sale of PFG, in the first half of 2015 compared to $3.5 million for the first half of 2014. For further information relating to the sale of PFG see Note 5—Dispositions, Assets Held for Sale and Discontinued Operations, in the accompanying consolidated financial statements.

Net income available to Class A common stockholders

The net income attributable to Class A common stockholders for the quarter ended June 30, 2015 was a net gain of $15.0 million compared to net income of $2.0 million for the same period in 2014. The change in net income available to Class A common stockholders was primarily driven by the improvement in the Company’s after-tax net income to $19.8 million for the second quarter of 2015, from net income of $4.0 million for the second quarter of 2014, together with the effect of exchanges of limited partnership units for Class A common stock in the third and fourth quarters of 2014. As of June 30, 2015, the Class A common stockholders were entitled, directly or indirectly, to approximately 77% of the net income of the Company, compared to approximately 25% as of June 30, 2014. For more information on the Company’s structure, see Note 1—Organization, in the accompanying consolidated financial statements.

Balance Sheet Information - as of June 30, 2015 compared to the year ended December 31, 2014

The Company’s total assets were $3.4 billion as of June 30, 2015, compared to $8.2 billion as of December 31, 2014. The $4.8 billion decline in assets is primarily attributable to the completion of the sale of PFG and the corresponding removal of PFG separate account assets as at June 30, 2015. Total stockholders’ equity of the Company was $405.3 million as of June 30, 2015 compared to $401.6 million as of December 31, 2014. Total stockholders’ equity of Tiptree Financial was $296.7 million as of June 30, 2015 compared to $284.5 million as of December 31, 2014. The primary reason for the change in Tiptree Financial Inc. stockholders’ equity was the gain attributable to Class A stockholders and the declaration and/or payments of dividends to stockholders in the first half of 2015.

Non-GAAP Financial Measures

Management uses EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. The Company believes that consolidated EBITDA and Adjusted EBITDA on a consolidated basis and for each segment provide supplemental information useful to investors as it is frequently used by the financial community to analyze performance period to period, to analyze a company’s ability to service its debt and to facilitate comparison among companies. The Company believes segment EBITDA and Adjusted EBITDA provides additional supplemental information to compare results among our segments. EBITDA and Adjusted EBITDA are not a measurement of financial performance or liquidity under GAAP; therefore, EBITDA and Adjusted EBITDA should not be considered as an alternative or substitute for GAAP. The Company’s presentation of EBITDA and Adjusted EBITDA may differ from similarly titled non-GAAP financial measures used by other companies. The Company defines EBITDA as GAAP net income of the Company adjusted to add consolidated interest expense, consolidated income taxes and consolidated depreciation and amortization expense as presented in its financial statements and Adjusted EBITDA as EBITDA adjusted to (i) subtract interest expense on asset-specific debt incurred in the ordinary course of its subsidiaries’ business operations, (ii) adjust for the effect of purchase accounting, (iii) add back significant acquisition related costs and (iv) adjust for significant relocation costs.

EBITDA and ADJUSTED EBITDA - Three months ended June 30, 2015 and June 30, 2014
Reconciliation from the Company’s GAAP net income to Non-GAAP financial measures - EBITDA and Adjusted EBITDA
(Unaudited)
(in thousands)
Three months ended June 30,
 
2015
 
2014
Net income available to Class A common stockholders
$
14,962

 
$
2,039

Add: net income attributable to noncontrolling interests
4,832

 
1,983

Less: net income from discontinued operations
21,003

 
2,186

Income (loss) from Continuing Operations of the Company
$
(1,209
)
 
$
1,836


Page 16


Reconciliation from the Company’s GAAP net income to Non-GAAP financial measures - EBITDA and Adjusted EBITDA
(Unaudited)
(in thousands)
Three months ended June 30,
Consolidated interest expense
6,194

 
2,643

Consolidated income taxes
(371
)
 
(1,080
)
Consolidated depreciation and amortization expense
11,359

 
1,662

EBITDA for Continuing Operations
$
15,973

 
$
5,061

Consolidated non-corporate and non-acquisition related interest expense(1)
(2,663
)
 
(1,289
)
Effects of Purchase Accounting related to the Fortegra acquisition(2)
(6,118
)
 
—

Significant non-recurring costs
—

 
—

Subtotal Adjusted EBITDA for Continuing Operations of the Company
$
7,192

 
$
3,772


 
 
 
Income from Discontinued Operations of the Company(3)
$
21,003

 
$
2,186

Consolidated interest expense
2,572

 
2,896

Consolidated income taxes
1,054

 
1,577

Consolidated depreciation and amortization expense
404

 
937

EBITDA for Discontinued Operations
$
25,033

 
$
7,596

Consolidated non-corporate and non-acquisition related interest expense
—

 
—

Significant relocation costs
—

 
—

Subtotal Adjusted EBITDA for Discontinued Operations of the Company
$
25,033

 
$
7,596


 
 
 
Total Adjusted EBITDA of the Company
$
32,225

 
$
11,368

(1)
The consolidated non-corporate and non-acquisition related interest expense subtracted from Adjusted EBITDA includes interest expense associated with asset-specific debt at subsidiaries in the Specialty Finance, Real Estate and Corporate and Other segments. For the quarter ended June 30, 2015, interest expense for the asset-specific debt was $834 thousand for Specialty Finance, $1.7 million for Real Estate and $83 thousand for Corporate and Other, totaling $2.7 million. For the quarter ended June 30, 2014, interest expense for the asset-specific debt was $311 thousand for Specialty Finance and $1.0 million for Real Estate totaling $1.3 million.
(2)
Tiptree’s purchase of Fortegra resulted in a number of purchase accounting adjustments being made as of the date of acquisition, which included setting deferred cost assets to a fair value of zero, modifying deferred revenue liabilities to their respective fair values, and recording a substantial intangible asset representing the value of the acquired insurance policies and contracts. Following the purchase accounting adjustments, current period expenses associated with deferred costs were more favorably stated by $7.9 million and current period income associated with deferred revenues were less favorably stated by $1.8 million. Thus, the purchase accounting effect increased EBITDA in the second quarter of 2015 by $6.1 million above what the historical basis of accounting would have generated. The impact of purchase accounting has been reversed to reflect an adjusted EBITDA without the purchase accounting effect.
(3)
See Note 5—Dispositions, Asset Held for Sale and Discontinued Operations, in the accompanying consolidated financial statements for further discussion of discontinued operations.
EBITDA and ADJUSTED EBITDA - Six months ended June 30, 2015 and June 30, 2014
Reconciliation from the Company’s GAAP net income to Non-GAAP financial measures - EBITDA and Adjusted EBITDA
(Unaudited)
(in thousands)
Six months ended June 30,
 
2015
 
2014
Net income available to Class A common stockholders
$
13,983

 
$
3,665

Add: net income attributable to noncontrolling interests
3,792

 
3,959

Less: net income from discontinued operations
23,348

 
3,476

Income (loss) from Continuing Operations of the Company
$
(5,573
)
 
$
4,148

Consolidated interest expense
11,323

 
5,457


Page 17


Reconciliation from the Company’s GAAP net income to Non-GAAP financial measures - EBITDA and Adjusted EBITDA
(Unaudited)
(in thousands)
Six months ended June 30,
Consolidated income taxes
(1,867
)
 
(1,732
)
Consolidated depreciation and amortization expense
26,823

 
3,330

EBITDA for Continuing Operations
$
30,706

 
$
11,203

Consolidated non-corporate and non-acquisition related interest expense(1)
(4,441
)
 
(2,938
)
Effects of Purchase Accounting related to the Fortegra acquisition(2)
(15,601
)
 
—

Significant non-recurring costs
1,349

 
—

Subtotal Adjusted EBITDA for Continuing Operations of the Company
$
12,013

 
$
8,265


 
 
 
Income from Discontinued Operations of the Company(3)
$
23,348

 
$
3,476

Consolidated interest expense
5,226

 
5,810

Consolidated income taxes
3,796

 
2,658

Consolidated depreciation and amortization expense
862

 
1,740

EBITDA for Discontinued Operations
$
33,232

 
$
13,684

Consolidated non-corporate and non-acquisition related interest expense
—

 
—

Significant relocation costs
—

 
—

Subtotal Adjusted EBITDA for Discontinued Operations of the Company
$
33,232

 
$
13,684


 
 
 
Total Adjusted EBITDA of the Company
$
45,245


$
21,949

(1)
The consolidated non-corporate and non-acquisition related interest expense is subtracted from EBITDA to arrive at Adjusted EBITDA. This includes interest expense associated with asset-specific debt at subsidiaries in the Specialty Finance and Real Estate. For the six months ended June 30, 2015, interest expense for the asset-specific debt was $1.3 million for Specialty Finance, $3.0 million for Real Estate and $83 thousand for Corporate and other, totaling $4.4 million. For the six months ended June 30, 2014, interest expense for the asset-specific debt was 455 thousand for Specialty Finance, $2.0 million for Real Estate, and $527.0 thousand for Corporate and Other segments, totaling $2.9 million.
(2)
Tiptree’s purchase of Fortegra resulted in a number of purchase accounting adjustments being made as of the date of acquisition, which included setting deferred cost assets to a fair value of zero, modifying deferred revenue liabilities to their respective fair values, and recording a substantial intangible asset representing the value of the acquired insurance policies and contracts. Following the purchase accounting adjustments, current period expenses associated with deferred costs were more favorably stated by $20.3 million and current period income associated with deferred revenues were less favorably stated by $4.7 million. Thus, the purchase accounting effect increased EBITDA in the second half of 2015 by $15.6 million above what the historical basis of accounting would have generated. The impact of purchase accounting has been reversed to reflect an adjusted EBITDA without the purchase accounting effect.
(3)
See Note 5—Dispositions, Asset Held for Sale and Discontinued Operations, in the accompanying consolidated financial statements for further discussion of discontinued operations.

Page 18


Segment EBITDA and ADJUSTED EBITDA from continuing operations - Three months ended June 30, 2015 and June 30, 2014 (Unaudited)
($ in thousands)
Segment EBITDA and ADJUSTED EBITDA - Three months ended June 30, 2015 and June 30, 2014
 
Insurance and insurance services
 
Specialty finance
 
Real estate
 
Asset management
 
Corporate and other
 
Totals
 
Three months ended June 30,
 
Three months ended June 30,
 
Three months ended June 30,
 
Three months ended June 30,
 
Three months ended June 30,
 
Three months ended June 30,
 
2015
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
Pre tax income/(loss)
$
6,300

 
$
568

$
(731
)
 
$
(1,969
)
$
(751
)
 
$
2,351

$
2,577

 
$
(8,830
)
$
(339
)
 
$
(1,580
)
$
756

Add back:
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Interest expense
1,775

 
834

311

 
1,810

978

 
—

—

 
1,775

1,354

 
6,194

2,643

Depreciation and amortization expenses
7,258

 
124

127

 
3,945

1,535

 
—

—

 
32

—

 
11,359

1,662

Segment EBITDA
$
15,333

 
$
1,526

$
(293
)
 
$
3,786

$
1,762

 
$
2,351

$
2,577

 
$
(7,023
)
$
1,015

 
$
15,973

$
5,061

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBITDA adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-specific debt interest
—

 
(834
)
(311
)
 
(1,746
)
(978
)
 
—

—

 
(83
)
—

 
(2,663
)
(1,289
)
Fortegra purchase accounting
(6,118
)
 
—

—

 
—

—

 
—

—

 
—

—

 
(6,118
)
—

Significant acquisition expenses
—

 
—

—

 
—

—

 
—

—

 
—

—

 
—

—

Segment Adjusted EBITDA
$
9,215

 
$
692

$
(604
)
 
$
2,040

$
784

 
$
2,351

$
2,577

 
$
(7,106
)
$
1,015

 
$
7,192

$
3,772

Segment EBITDA and ADJUSTED EBITDA from continuing operations - Six months ended June 30, 2015 and June 30, 2014 (Unaudited)
($ in thousands)
Segment EBITDA and ADJUSTED EBITDA - Six months ended June 30, 2015 and June 30, 2014
 
Insurance and insurance services
 
Specialty finance
 
Real estate
 
Asset management
 
Corporate and other
 
Totals
 
Six months ended June 30,
 
Six months ended June 30,
 
Six months ended June 30,
 
Six months ended June 30,
 
Six months ended June 30,
 
Six months ended June 30,
 
2015
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
 
2015
2014
Pre tax income/(loss)
$
10,326

 
$
1,003

$
(1,467
)
 
$
(6,150
)
$
(1,515
)
 
$
4,525

$
4,896

 
$
(17,144
)
$
502

 
$
(7,440
)
$
2,416

Add back:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
3,514

 
1,345

455

 
3,140

1,956

 
—

—

 
3,324

3,046

 
11,323

5,457

Depreciation and amortization expenses
19,212

 
246

237

 
7,333

3,093

 
—

—

 
32

—

 
26,823

3,330

Segment EBITDA
$
33,052

 
$
2,594

$
(775
)
 
$
4,323

$
3,534

 
$
4,525

$
4,896

 
$
(13,788
)
$
3,548

 
$
30,706

$
11,203

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBITDA adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-specific debt interest
—

 
(1,345
)
(455
)
 
(3,013
)
(1,956
)
 
—

—

 
(83
)
(527
)
 
(4,441
)
(2,938
)
Fortegra purchase accounting
(15,601
)
 
—

—

 
—

—

 
—

—

 
—

—

 
(15,601
)
—

Significant acquisition expenses
—

 
—

—

 
1,349

—

 
—

—

 
—

—

 
1,349

—

Segment Adjusted EBITDA
$
17,451

 
$
1,249

$
(1,230
)
 
$
2,659

$
1,578

 
$
4,525

$
4,896

 
$
(13,871
)
$
3,021

 
$
12,013

$
8,265


Liquidity and Capital Resources

Tiptree is a holding company and its liquidly needs are primarily for interest payments on the Fortress credit facility, compensation, professional fees, office rent and insurance costs.

The Company’s principal sources of liquidity are its holdings of cash, cash equivalents and other liquid investments and distributions from operating subsidiaries and principal investments, including subordinated notes of CLOs. The Company intends to use its cash resources to continue to grow its businesses. Tiptree may seek additional sources of cash to fund acquisitions or

Page 19


investments. These additional sources of cash may take the form of debt or equity and may be at the parent, subsidiary or asset level.

The ability of Tiptree’s subsidiaries to generate sufficient net income and cash flows to make cash distributions will be subject to numerous business and other factors, including restrictions contained in our subsidiaries’ financing agreements, regulatory restrictions, availability of sufficient funds at such subsidiaries, general economic and business conditions, tax considerations, strategic plans, financial results and other factors such as target capital ratios and ratio levels anticipated by rating agencies to maintain or improve current ratings.

We expect our cash and cash equivalents and distributions from operating subsidiaries and principal investments and our subsidiaries access to financing to be adequate to fund our operations for at least the next 12 months.

At June 30, 2015, the Company had unrestricted cash of $170.1 million, a net increase of $123.7 million from March 31, 2015. The primary components of the increase are discussed below.

During the second quarter of 2015, the Company received $142.8 million of cash (prior to payment of taxes) from the sale of PFG. Under the terms of the Fortress credit agreement, the Company used $25 million of the proceeds of the sale of PFG to repay borrowings under the Fortress credit agreement. In addition, taxes associated with the sale of PFG are expected to be approximately $25.9 million. For additional information, see Note 5-Dispositions, Asset Held for Sale and Discontinued Operations and Note 23-Income Taxes, in the accompanying consolidated financial statements.

During the second quarter of 2015, the Company sold all its holdings of the subordinated notes of Telos 2 and Telos 4 for a total of $39.7 million. As a consequence of the sale, the Company will not receive any future distributions on the subordinated notes of Telos 2 and Telos 4. For the fiscal year 2014, distributions from the subordinated notes of Telos 2 and Telos 4 were $13.6 million of the total distributions of $16.1 million of all subordinated notes held by the Company.

Consolidated Comparison of Cash Flows

Summary Consolidated Statements of Cash Flows - Six months ended June 30, 2015 and June 30, 2014
($ in thousands)
Six months ended June 30,
 
2015
 
2014
Net cash provided by/(used in):
 
 
 
Operating activities
 
 
 
Operating activities - continuing operations (excluding VIEs)
$
(18,399
)
 
$
61,734

Operating activities - VIEs
17,004

 
(625
)
Operating activities - discontinued operations
(6,198
)
 
(3,633
)
Total cash provided by operating activities
(7,593
)
 
57,476

 
 
 
 
Investing activities
 
 
 
Operating activities - continuing operations (excluding VIEs)
(42,949
)
 
55,270

Operating activities - VIEs
57,991

 
(298,199
)
Operating activities - discontinued operations
11,866

 
8,423

Total cash provided by investing activities
26,908

 
(234,506
)
 
 
 
 
Financing activities
 
 
 
Operating activities - continuing operations (excluding VIEs)
96,532

 
(98,480
)
Operating activities - VIEs
(22,095
)
 
280,003

Operating activities - discontinued operations
(5,000
)
 
(3,000
)
Total cash provided by financing activities
69,437

 
178,523

 
 
 
 
Net increase in cash
$
88,752

 
$
1,493


Page 20


The amounts associated with operating, investing and financing activities for the six months ended June 30, 2015 and 2014 from discontinued operations are presented as a component of the Company’s consolidated statements of cash flows.
Operating Activities

Cash used for operating activities was $7.6 million for the six months ended June 30, 2015, compared to cash provided by operating activities of $57.5 million for the six months ended June 30, 2014, a change of $65.1 million. For the six months ended June 30, 2015, net cash provided by operating activities of VIE’s was $17.0 million and net cash used for discontinued operations was $6.2 million. For the six months ended June 30, 2014, net cash used by operating activities of VIEs was $625 thousand and cash used by discontinued operations was $3.6 million. Excluding the activity attributable to the VIEs and discontinued operations, net cash used for continuing operating activities was $18.4 million for the six months ended June 30, 2015, compared to cash provided of $61.7 million for the same period in 2014, a decline of $80.1 million. Cash used for continuing operating activities in the first half of 2015 was primarily driven by increases in Fortegra’s reinsurance receivables of $35.3 million, increases in Luxury’s loans held for sale of $20.8 million, increases in deferred tax benefits of $11.1 million and by increases in other assets of $57.5 million. The increases in other assets held by the Company at June 30, 2015 principally consisted of premium receivables and deferred acquisition costs at Fortegra. Partly offsetting these increases in assets were increases in other liabilities and accrued expenses of $50.2 million and an increase in Fortegra’s unearned premiums of $33.7 million.

Investing Activities

Cash provided by investing activities for the six months ended June 30, 2015 was $26.9 million, compared to cash used of $234.5 million for the six months ended June 30, 2014, an increase of $261.4 million. For the six months ended June 30, 2015, cash provided by VIE investing activities was $58.0 million and cash provided by discontinued operations was $11.9 million as compared with $298.2 million in cash used for VIE investing activities and $8.4 million cash provided by discontinued operations for the six months ended June 30, 2014. Excluding VIE and discontinued operations investing activity, cash used for investing activities was $42.9 million for the six months ended June 30, 2015 compared to cash provided for investing activities of $55.3 million for the same period in 2014, a decrease of $98.2 million. Cash used for investing activities in 2015 was largely comprised of purchases of real estate of $83.7 million, purchases of available for sale securities of $28.4 million, and purchases of trading securities and loans carried at fair value of $64.2 million. The increase in purchases of real estate were largely the result of new joint ventures and triple net lease deals entered into by Care in 2015. These purchases were partly offset by proceeds from the sale of PFG of $113.8 million and proceeds from maturities of available for sale securities of $16.4 million.

Financing Activities

Cash provided by financing activities for the six months ended June 30, 2015 was $69.4 million, compared to cash provided of $178.5 million for the six months ended June 30, 2014, a decrease of $109.1 million. For the six months ended June 30, 2015, cash used for VIE financing activities was $22.1 million and cash used for discontinued financing activities was $5.0 million. For the six months ended June 30, 2014, cash provided by VIE financing activities was $280.0 million and cash used for discontinued investing activities was $3.0 million. Excluding the activity attributable to VIEs and discontinued operations, cash provided by financing activities for the six months ending June 30, 2015 was $96.5 million, compared to cash used for financing activities of $98.5 million during the same period in 2014, an increase of $195.0 million. The cash provided by financing activities in the six months ended June 30, 2015 was largely due to the proceeds from new borrowings, partly offset by principal repayments. Proceeds from borrowings, net of principal repayments, were $101.1 million in the six months ended June 30, 2015, compared to net repayments of $98.2 million in six months ended June 30, 2014. The increase in net new borrowings in 2015 is largely due to net increases in borrowings at Siena and Luxury to fund their lending activities and from mortgage notes taken on by Care to fund their property acquisitions.


Page 21


Contractual Obligations

The table below summarizes Tiptree’s consolidated contractual obligations by period for payments that are due as of June 30, 2015:
($ in thousands)
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
 
Total 
Mortgage notes payable and related interest (1)
$
4,448

 
$
19,302

 
$
52,536

 
$
138,555

 
$
214,841

Trust Preferred Securities (2)
—

 
—

 
—

 
35,000

 
35,000

Notes payable CLOs (3)
—

 
—

 
—

 
1,862,746

 
1,862,746

Credit agreement/Revolving line of credit (4)
9,993

 
53,109

 
132,500

 
—

 
195,602

Operating lease obligations (5)
3,031

 
6,486

 
4,644

 
2,964

 
17,125

Total
$
17,472

 
$
78,897

 
$
189,680

 
$
2,039,265

 
$
2,325,314

(1)
Mortgage notes payable include mortgage notes entered into by Care LLC in connection with its acquisition of several properties and the mortgage note entered into by Luxury Mortgage Corp with the Bank of Danbury (see Note 15—Debt, in the accompanying consolidated financial statements).
(2)
Fortegra has $35.0 million of fixed/floating rate trust preferred securities due June 15, 2037. The trust preferred securities bear interest at a floating rate of 3-month LIBOR plus the annual base rate of 4.10%. Interest is payable quarterly. In 2012, Fortegra entered into an interest rate swap that exchanges the floating rate for a fixed rate, as further described in Note 14—Derivative Financial Instruments and Hedging. The Company may redeem the trust preferred securities, in whole or in part, at a price equal to the full outstanding principal amount of such trust preferred securities outstanding plus accrued and unpaid interest.
(3)
Non-recourse CLO notes payable principal is payable at stated maturity, 2021 for Telos 1, 2022 for Telos 2, 2024 for Telos 3 and Telos 4, 2025 for Telos 5 and 2027 for Telos 6.
(4)
On September 18, 2013, Operating Company entered into a credit agreement with Fortress and borrowed $50.0 million under the credit agreement. The credit agreement also included an option for Operating Company to borrow additional amounts up to a maximum aggregate of $125.0 million, subject to satisfaction of certain customary conditions. On January 26, 2015, Tiptree entered into a First Amendment to its existing Fortress credit agreement (the “Amendment”) providing for additional term loans in an aggregate principal amount of $25.0 million to Tiptree. Tiptree paid down $25.0 million of the loans under the Fortress credit agreement upon the closing of the PFG sale on June 30, 2015 (see Note 15—Debt, in the accompanying consolidated financial statements, for further detail).
On July 25, 2013, Siena closed on a line of credit with Wells Fargo Bank. As of June 30, 2015 this revolving line is $65.0 million with an interest rate of LIBOR plus 250 basis points and a maturity date of October 17, 2016. As of June 30, 2015, there was $38.3 million outstanding on this line (see Note 15—Debt, in the accompanying consolidated financial statements).
On April 9, 2015, Siena entered into a $3.5 million subordinated promissory note with Solaia Credit Strategies LLC, an affiliate of Solaia Capital Management LLC, which owns approximately 38% of Siena. $1.5 million of this note was funded on April 9, 2015 and the remainder was funded on May 14, 2015. The note has a maturity of April 9, 2020 or six months following maturity of the Wells Fargo facility described above. The note has an interest rate of 12.50%. Siena may prepay the note following the first anniversary of issuance but is required to pay a prepayment premium expensed as a percentage of the prepayment amount as follows: 3% prior to the second anniversary of issuance; 2% after the second but before the third anniversary and 1% after the third but before the fourth anniversary.
On December 4, 2014, Fortegra entered into an amended and restated $140.0 million secured credit agreement (the “Credit Agreement”) among: (i) Fortegra and its wholly owned subsidiary LOTS Intermediate Co. (“LOTS”), as borrowers (Fortegra and LOTS, collectively, the “Borrowers”); (ii) the initial lenders named therein; and (iii) Wells Fargo Bank, National Association, as administrative agent, swingline lender, and issuing lender. The Credit Agreement provides for a $50.0 million term loan facility and a $90.0 million revolving credit facility. Subject to earlier termination, the Credit Agreement terminates on December 4, 2019. The weighted average rate paid for the six months ended June 30, 2015 was 3.18%. The Borrowers are required to repay the aggregate outstanding principal amount of the initial $50.0 million term loan facility in consecutive quarterly installments of $1.25 million commencing March 2015.
Fortegra has a $15.0 million revolving line of credit agreement (the “Line of Credit”) with Synovus Bank, entered into on October 9, 2013, with a maturity date of April 30, 2017.  The Line of Credit bears interest at a rate of 300 basis points plus 90-day LIBOR, and is available specifically for the South Bay premium financing product. The weighted average rate paid for the six months ended June 30, 2015 was 3.27%.
(5)
Minimum rental obligation for Tiptree, Care, MFCA, Siena, Luxury and Fortegra office leases. The total rent expense for the Company for the three months ended June 30, 2015 and 2014 was $1.4 million and $622 thousand, respectively. The total rent expense for the Company for the six months ended June 30, 2015 and 2014 was $2.4 million and $1.2 million, respectively.

Tiptree’s subsidiary Siena, issues standby letters of credit for credit enhancements that are required by their borrower’s respective businesses. As of June 30, 2015 there was $3.3 million outstanding relating to these letters of credit.


Page 22


Critical Accounting Policies and Estimates

The preparation of our financial statements in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ materially from those estimates. There have been no material changes to the critical accounting policies and estimates as discussed in our 2014 Annual Report on Form 10-K.

Recently Adopted and Issued Accounting Standards

For a discussion of recently adopted and issued accounting standards see the section “Recent Accounting Standards” in Note 2—Summary of Significant Accounting Policies of the notes to the accompanying consolidated financial statements.

Off-Balance Sheet Arrangements

Luxury enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes, as well as commitments to sell real estate loans to various investors. Substantially all of Luxury’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. In addition, Siena issues standby letters of credit to customers which generally guarantee the borrower’s performance. Other than these commitments to originate and sell loans and letters of credit, the Company did not guarantee any obligations of unconsolidated entities, or express intent to provide additional funding to any such entities. Other than the consolidation of Telos 1, Telos 2, Telos 3, Telos 4, Telos 5 and Telos 6, Tiptree does not maintain any other relationships with unconsolidated entities or financial partnerships, special purpose or VIEs, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of June 30, 2015, Tiptree did not guarantee any obligations of unconsolidated entities, enter into any commitments or express intent to provide additional funding to any such entities.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we are not required to provide the information contained in this Item.

Item 4. Controls and Procedures

The Company’s management, with the participation of its Co-Chief Executive Officer and Chief Operating Officer acting as the principal accounting officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act) as of June 30, 2015. Based upon that evaluation, the Company’s Co-Chief Executive Officer and Chief Operating Officer have concluded that, because the remediation measures designed to address the material weakness in its internal control over financial reporting described below have not yet been fully implemented or sufficiently tested, the Company’s disclosure controls and procedures were not effective as of June 30, 2015.

All systems of internal control, no matter how well designed, have inherent limitations. Therefore, even those systems deemed to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

The Company conducted an evaluation of the effectiveness of its internal control over financial reporting based upon the framework in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. If we identify any material weaknesses, the rules do not allow the Company to conclude that our internal control over financial reporting is effective.

As of June 30, 2015, the Company identified internal control deficiencies relating to the review of (1) the Company’s accounting for income taxes, (2) the presentation and classification of cash flow statement amounts and (3) acquisition related accounting. The Company believes these deficiencies were the result of staffing levels in the Company’s accounting and finance group at that time, including staff turnover during the first quarter of 2015. The aggregate of these internal control deficiencies resulted in a material weakness in internal control over financial reporting as of March 31, 2015. The Company made corrections in the current period related to income taxes, cash flow reclassifications and acquisition related accounting. The Company has determined that corrections in the prior periods were immaterial.


Page 23

To remediate the material weakness in internal control over financial reporting described above, the Company is executing on its pre-existing plan to replace departed staff and to add additional accounting resources. Specifically, the Company has taken the following steps to remediate the internal control deficiencies described above (1) hired additional accounting and finance staff, including a Chief Financial Officer to replace the Chief Financial Officer who departed in the first quarter of 2015, a Vice President, Tax, and a Vice President, SOX Compliance and Risk Management, (2) added procedures to review the Company’s accounting for income taxes (3) added procedures to reconcile the presentation and classification of cash flow statement amounts and (4) added procedures to review the Company’s acquisition related accounting. The Company has identified and is pursuing the hiring of additional accounting and finance staff to further assist in the preparation and review of its financial information. The Company is committed to achieving and maintaining a strong internal control environment and believes that these remediation efforts will result in significant improvements in our controls during the current fiscal year. This commitment is accompanied by management’s focus on processes and related controls to achieve accurate and reliable financial reporting. The Company has begun to implement the remediation efforts described above; however until the remediation actions are fully implemented and the operational effectiveness of related internal controls validated through testing, the material weakness described above will continue to exist.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Tiptree’s Fortegra subsidiary is a defendant in Mullins v. Southern Financial Life Insurance Co., which was filed on February 2, 2006, in the Pike Circuit Court, in the Commonwealth of Kentucky. A class was certified on June 25, 2010. At issue is the duration or term of coverage under certain policies. The action alleges violations of the Consumer Protection Act and certain insurance statutes, as well as common law fraud. The action seeks compensatory and punitive damages, attorney fees and interest. Plaintiffs filed a Motion for Sanctions on April 5, 2012 in connection with Fortegra's efforts to locate and gather certificates and other documents from Fortegra's agents. While the court did not award sanctions, it did order Fortegra to subpoena certain records from its agents. Although Fortegra appealed the order on numerous grounds, the Kentucky Supreme Court ultimately denied the appeal in April 2014. Consequently, Fortegra has retained a special master to facilitate the collection of certificates and other documents from Fortegra's agents. On January 29, 2015, the trial court issued an Order denying Fortegra’s motion to decertify the class, which Fortegra has appealed. On July 8, 2015, the Kentucky Court of Appeals denied Fortegra’s appeal, on the grounds that the court lacked subject-matter jurisdiction. No trial or hearings are currently scheduled in this matter.

In management's opinion, based on information available at this time, the ultimate resolution of such litigation, which it is vigorously defending, should not be materially adverse to the financial position of Tiptree. It should be noted that large punitive damage awards, bearing little relation to actual damages sustained by plaintiffs, have been awarded in certain states against other companies in the credit insurance business. At this time, the Company cannot estimate a range of loss that is reasonably possible.

Tiptree and its subsidiaries are parties to other legal proceedings in the ordinary course of business. Although Tiptree’s legal and financial liability with respect to such proceedings cannot be estimated with certainty, Tiptree does not believe that these proceedings, either individually or in the aggregate, are likely to have a material adverse effect on Tiptree’s financial position or results of operations.

Item 1A. Risk Factors

For information regarding factors that could affect our Company, results of operations and financial condition, see the risk factors discussed under Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. There has been no material change in those risk factors.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)
Recent Sales of Unregistered Securities

Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Share repurchase activity for the three months ended June 30, 2015 was as follows:

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Period
Purchaser
Total
Number of
Shares
Purchased(1)
Average
Price
Paid Per
Share
Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
Approximate
Dollar Value of
Shares That
May Yet Be
Purchased
Under the
Plans or
Programs
April 1, 2015 to April 30, 2015: Open Market Purchases
Tiptree Financial
58,996

$
6.73

58,996

$
1,495,377

Michael Barnes
58,980

6.73

58,980

1,501,766

Total
117,976

$
6.73

117,976

$
2,997,143

 
 
 
 
 
 
May 1, 2015 to May 31, 2015: Open Market Purchases
Tiptree Financial
63,257

$
6.67

63,257

$
1,073,725

Michael Barnes
63,200

6.67

63,200

1,080,339

Total
126,457

$
6.67

126,457

$
2,154,064

 
 
 
 
 
 
June 1, 2015 to June 30, 2015: Open Market Purchases
Tiptree Financial
138,827

$
7.25

138,827

$
66,677

Michael Barnes
138,820

7.29

138,820

68,533

Total
277,647

$
7.27

277,647

$
135,210


(1)
On December 4, 2014, Tiptree Financial engaged a broker in connection with a share repurchase program for the repurchase of up to $2.5 million of its outstanding Class A common stock. In addition, on the same date, Michael Barnes, Tiptree Financial’s Executive Chairman, entered into a Rule 10b5-1 plan pursuant to which he will, for his own account, purchase up to $2.5 million of Tiptree Financial’s outstanding Class A common stock. Repurchases by Tiptree Financial and purchases by Mr. Barnes will be made through a single broker and is anticipated to be allocated equally between Tiptree Financial and Mr. Barnes (or to Tiptree Financial in the case of trades that cannot be split evenly). The Company expects the share purchases to be made from time to time in the open market or through privately negotiated transactions, or otherwise, subject to applicable laws and regulations. Unless otherwise completed or terminated earlier, the repurchase program will expire on November 18, 2015.

The Company and Mr. Barnes continued to purchase shares under the share repurchase program through and until July 2, 2015 when the aggregate $5 million of Tiptree Class A common Stock had been purchased, thereby completing the share repurchase program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.


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Item 6. Exhibits, Financial Statement Schedules
The following documents are filed as a part of this Form 10-Q:
 
 
 
Financial Statements (Unaudited):
 
Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014
Consolidated Statements of Income for the three and six month periods ended June 30, 2015 and 2014
Consolidated Statements of Other Comprehensive Income for the three and six months ended June 30, 2015 and 2014
Consolidated Statement of Changes in Stockholders’ Equity for the period ended June 30, 2015
Consolidated Statements of Cash Flows for the six month periods ended June 30, 2015 and 2014
 
 
Exhibits:
 
The Exhibits listed in the Index of Exhibits, which appears immediately following the signature page, is incorporated herein by reference and is filed as part of this Form 10-Q.
 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, Tiptree Financial Inc. has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
 
 
 
Tiptree Financial Inc.
 
 
 
 
Date:
August 13, 2015
 
By:/s/ Geoffrey N. Kauffman 
 
 
 
Geoffrey N. Kauffman
 
 
 
Co-Chief Executive Officer
 
 
 
 
 
 
 
 
Date:
August 13, 2015
 
By:/s/ Julia Wyatt
 
 
 
Julia Wyatt
 
 
 
Chief Operating Officer



Page 27


EXHIBIT INDEX
Exhibit No.
Description
 
 
31.1
Certification of Co-Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
31.2
Certification of Chief Operating Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
32.1
Certification of Co-Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
 
 
32.2
Certification of Chief Operating Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
 
 
 
 
101.INS
XBRL Instance Document*
101.SCH
XBRL Taxonomy Extension Schema Document*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB
XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*
 
 
 
 
 
 
* Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets for June 30, 2015 and December 31, 2014, (ii) the Consolidated Statements of Income for the three and six months ended June 30, 2015 and 2014, (iii) the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2015 and 2014, (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the period ended June 30, 2015, (v) the Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014 and (vi) the Notes to the Consolidated Financial Statements.






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