Investments in Distressed Loans and Foreclosed Real Estate

Investments in Distressed Loans

The Company’s investment in distressed loans consisted of the following as of the dates indicated (amounts in thousands):



	January 31, 2013			October 31, 2012
Unpaid principal balance	$	91,339		$	99,693
Discount on acquired loans	(48,507		)	(62,524		)
Carrying value	$	42,832		$	37,169

The Company's investment in distressed loans includes performing loans and non-performing loans and also includes investments in loan participations classified as secured borrowings under ASC 860, "Transfers and Servicing".

For acquired distressed loans where it is probable that the Company will collect less than the contractual amounts due under the terms of the loan based, at least in part, on the assessment of the credit quality of the borrowers, the loans are accounted for under ASC Topic 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30"). Under ASC 310-30, provided the Company does not presently have the intention to utilize real estate secured by the loans for use in its operations or to significantly improve the collateral for resale, the amount by which the future cash flows expected to be collected at the acquisition date exceeds the estimated fair value of the loan, or accretable yield, is recognized in other income - net over the estimated remaining life of the loan using a level yield methodology . The difference between the contractually required payments of the loan as of the acquisition date and the total cash flows expected to be collected, or nonaccretable difference, is not recognized.

The Company may acquire distressed loans where it has determined that (1) it is possible to collect all contractual amounts due under the terms of the loan, (2) it expects to utilize the real estate secured by the loans in its operations, or (3) forecasted cash flows cannot be reasonably estimated. For non-performing loans acquired meeting these conditions, in accordance with ASC 310-10, "Receivable," the loans are classified as nonaccrual and interest income is not recognized. When a loan is classified as nonaccrual, any subsequent cash receipt is accounted for using the cost recovery method. For performing loans, payments are applied to principal and interest in accordance with the terms of the loan when received. As of January 31, 2013, the Company had investments in performing and non-performing loans, accounted for in accordance with ASC 310-10, of $14.0 million and $6.0 million, respectively. At October 31, 2012, the Company had investments in non-performing loans of $9.2 million. The Company had no investments in performing loans at October 31, 2012.

In the three months ended January 31, 2013, Gibraltar purchased distressed loans for approximately $16.1 million. The purchases included performing and non-performing loans secured by retail shopping centers, residential land and golf courses located in seven states.

The following table summarizes, for the distressed loans acquired in the three months ended January 31, 2012 that were accounted for in accordance with ASC 310-30, the accretable yield and the nonaccretable difference of the Company's investment in these loans as of their acquisition date (amounts in thousands).



	Three months ended January 31,
	2012
Contractually required payments, including interest	$	52,524
Nonaccretable difference	(5,125		)
Cash flows expected to be collected	47,399
Accretable yield	(20,514		)
Non-performing loans carrying amount	$	26,885

There were no distressed loans purchased during the three months ended January 31, 2013 that met the requirements of ASC 310-30.

The accretable yield activity for the Company’s investment in distressed loans accounted for under ASC 310-30 for the three-month periods ended January 31, 2013 and 2012 was as follows (amounts in thousands):



	Three months ended January 31,
	2013			2012
Balance, beginning of period	$	17,196		$	42,326
Loans acquired	—			20,514
Deletions	(2,387		)	(1,768		)
Accretion	(1,403		)	(3,228		)
Balance, end of period	$	13,406		$	57,844

Deletions primarily represent loan dispositions, which includes foreclosure of the underlying collateral and resulting removal of the loans from the accretable yield portfolios, and reclassifications from accretable yield to nonaccretable yield. The additions to nonaccretable yield and the accretion of interest income are based on various estimates regarding loan performance and the value of the underlying real estate securing the loans. As the Company continues to gather additional information regarding the loans and the underlying collateral, the accretable yield may change. Therefore, the amount of accretable income recorded in the three-month periods ended January 31, 2013 and 2012 is not necessarily indicative of expected future results.

Real Estate Owned (REO)

The following table presents the activity in REO for the three-month periods ended January 31, 2013 and 2012 (amounts in thousands):



	Three months ended January 31,
	2013			2012
Balance, beginning of period	$	58,353		$	5,939
Additions	11,040			1,164
Sales	(439		)	(615		)
Impairments	(15		)
Depreciation	(175		)
Balance, end of period	$	68,764		$	6,488

As of January 31, 2013, approximately $5.9 million and $62.8 million of REO was classified as held-for-sale and held-and-used, respectively. As of January 31, 2012, approximately $1.3 million and $5.2 million of REO was classified as held-for-sale and held-and-used, respectively. For the three-month period ended January 31, 2013, the Company recorded gains of $0.6 million from acquisitions of REO through foreclosure. There were no gains or losses recorded in the three-month period ended January 31, 2012 from REO conversions.

General

The Company’s earnings from Gibraltar's operations, excluding its investment in the Structured Asset Joint Venture, are included in other income - net in its Condensed Consolidated Statements of Operations. In the three-month periods ended January 31, 2013 and 2012, the Company recognized $0.2 million and $2.1 million of earnings, respectively, from Gibraltar's operations.