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):



	July 31, 2013			October 31, 2012
Unpaid principal balance	$	88,890		$	99,693
Discount on acquired loans	(46,390		)	(62,524		)
Carrying value	$	42,500		$	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 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 any of these conditions, in accordance with ASC 310-10, "Receivable," ("ASC 310-10") 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 July 31, 2013, the Company had investments in performing and non-performing loans, accounted for in accordance with ASC 310-10, of $11.3 million and $14.5 million, respectively. At October 31, 2012, the Company had investments in non-performing loans, accounted for in accordance with ASC 310-10, of $9.2 million. The Company had no investments in performing loans at October 31, 2012.

In the nine months ended July 31, 2013, Gibraltar purchased distressed loans for approximately $26.0 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 nine months ended July 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).



	Nine months ended July 31, 2012
Contractually required payments, including interest	$	58,234
Nonaccretable difference	(8,235		)
Cash flows expected to be collected	49,999
Accretable yield	(20,514		)
Non-performing loans carrying amount	$	29,485

There were no distressed loans purchased during the nine months ended July 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 nine-month and three-month periods ended July 31, 2013 and 2012 was as follows (amounts in thousands):



	Nine months ended July 31,						Three months ended July 31,
	2013			2012			2013			2012
Balance, beginning of period	$	17,196		$	42,326		$	11,229		$	49,256
Loans acquired				20,514
Additions	706			4,221			541			1,297
Deletions	(6,027		)	(24,090		)	(2,418		)	(14,141		)
Accretion	(3,510		)	(9,214		)	(987		)	(2,655		)
Balance, end of period	$	8,365		$	33,757		$	8,365		$	33,757

Additions primarily represent the reclassification to accretable yield from nonaccretable yield and the impact of impairments. Deletions primarily represent loan dispositions, which include 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 reclassifications between accretable and 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 nine-month and three-month periods ended July 31, 2013 and 2012 is not necessarily indicative of future results.

Real Estate Owned (REO)

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



	Nine months ended July 31,						Three months ended July 31,
	2013			2012			2013			2012
Balance, beginning of period	$	58,353		$	5,939		$	71,458		$	18,108
Additions	20,172			33,663			5,855			20,861
Sales	(4,713		)	(1,346		)	(3,801		)	(731		)
Impairments	(505		)	(126		)	(490		)	(126		)
Depreciation	(395		)	(138		)	(110		)	(120		)
Balance, end of period	$	72,912		$	37,992		$	72,912		$	37,992

As of July 31, 2013, approximately $9.7 million and $63.2 million of REO was classified as held-for-sale and held-and-used, respectively. As of July 31, 2012, approximately $1.8 million and $36.2 million of REO was classified as held-for-sale and held-and-used, respectively. For the nine-month and three-month periods ended July 31, 2013, the Company recorded gains of $3.1 million and $1.6 million from acquisitions of REO through foreclosure, respectively. For the nine-month period ended July 31, 2012, the Company recorded gains of $1.7 million from acquisitions of REO through foreclosure. During the three-month period ended July 31, 2012, the Company recorded a small loss from acquisitions of REO through foreclosure.

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 nine-month periods ended July 31, 2013 and 2012, the Company recognized $5.2 million and $6.5 million of earnings (excluding earnings from its investment in the Structured Asset Joint Venture), respectively, from Gibraltar's operations. In the three-month periods ended July 31, 2013 and 2012, the Company recognized $4.1 million and $0.6 million of earnings (excluding earnings from its investment in the Structured Asset Joint Venture), respectively, from Gibraltar's operations.