10-Q 1 rexi20130331-10q.htm 10-Q REXI.2013.03.31-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549 
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013
or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 0-4408
 
RESOURCE AMERICA, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
72-0654145
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
One Crescent Drive, Suite 203, Navy Yard Corporate Center, Philadelphia, PA  19112
(Address of principal executive offices) (Zip code)
(215) 546-5005
(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
 
NASDAQ Global Select Market
Title of class
 
Name of exchange on which registered
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 þ No o
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ 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.
Large accelerated filer
o
 
Accelerated filer   
þ
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The number of outstanding shares of the registrant’s common stock on May 2, 2013 was 20,168,092 shares.


RESOURCE AMERICA, INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT
ON FORM 10-Q
 
 
Page
PART I
 
 
 
 
 
Item 1:
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2:
 
 
 
Item 3:
 
 
 
Item 4:
 
 
 
PART II
 
 
 
 
 
Item 2:
 
 
 
Item 6:
 
 
 



PART I

ITEM 1.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


RESOURCE AMERICA, INC
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
March 31,
2013
 
September 30,
2012
ASSETS
(unaudited)

 
 
Cash
$
15,372

 
$
19,393

Restricted cash
544

 
642

Receivables
403

 
3,554

Receivables from managed entities and related parties, net
32,328

 
41,051

Investments in real estate, net
17,103

 
19,149

Investment securities, at fair value
28,207

 
22,532

Investments in unconsolidated loan manager
37,803

 
36,356

Investments in unconsolidated entities
13,395

 
12,993

Property and equipment, net
2,446

 
2,732

Deferred tax assets, net
35,359

 
34,565

Other assets
6,567

 
3,776

Total assets
$
189,527

 
$
196,743

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Liabilities:
 

 
 

Accrued expenses and other liabilities
$
18,651

 
$
23,042

Payables to managed entities and related parties
3,160

 
4,380

Borrowings
22,316

 
23,020

Total liabilities
44,127

 
50,442

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Equity:
 

 
 

Preferred stock, $1.00 par value, 1,000,000 shares authorized; none outstanding
—

 
—

Common stock, $.01 par value, 49,000,000 shares authorized; 30,082,416
and 29,866,664 shares issued (including nonvested restricted stock of 437,661
and 403,195), respectively
296

 
294

Additional paid-in capital
286,340

 
285,844

Accumulated deficit
(26,983
)
 
(24,508
)
Treasury stock, at cost; 9,915,167 and 9,756,955 shares, respectively
(103,446
)
 
(102,457
)
Accumulated other comprehensive loss
(11,044
)
 
(13,080
)
Total stockholders’ equity
145,163

 
146,093

Noncontrolling interests
237

 
208

Total equity
145,400

 
146,301

 
$
189,527

 
$
196,743



The accompanying notes are an integral part of these statements
3


RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
 
2013
 
2012
 
2013
 
2012
REVENUES:
 
 
 
 
 
 
 
Real estate
$
11,340

 
$
9,716

 
$
24,494

 
$
18,382

Financial fund management
4,287

 
6,304

 
6,962

 
12,883

Commercial finance
(178
)
 
(1,240
)
 
(302
)
 
2,179

 
15,449

 
14,780

 
31,154

 
33,444

COSTS AND EXPENSES:
 

 
 

 
 
 
 
Real estate
9,440

 
7,407

 
17,438

 
14,599

Financial fund management
2,528

 
4,379

 
3,545

 
10,183

Commercial finance
45

 
230

 
(4
)
 
2,193

Restructuring expenses
—

 
365

 
—

 
365

General and administrative
2,157

 
2,467

 
4,413

 
5,363

Gain on sale of leases and loans
—

 
—

 
—

 
(37
)
Provision for credit losses
338

 
2,962

 
5,490

 
5,212

Depreciation and amortization
416

 
535

 
908

 
2,596

 
14,924

 
18,345

 
31,790

 
40,474

OPERATING INCOME (LOSS)
525

 
(3,565
)
 
(636
)
 
(7,030
)
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 

 
 

 
 
 
 
Gain on deconsolidation and sale of subsidiaries
—

 
—

 
—

 
8,749

Loss on extinguishment of debt
—

 
—

 
—

 
(2,190
)
Gain on sale of investment securities, net
—

 
5

 
—

 
63

Other-than-temporary impairment on investments
(214
)
 
(74
)
 
(214
)
 
(74
)
Interest expense
(494
)
 
(645
)
 
(1,016
)
 
(3,619
)
Other income, net
740

 
625

 
1,328

 
1,184

 
32

 
(89
)
 
98

 
4,113

Income (loss) from continuing operations before taxes
557

 
(3,654
)
 
(538
)
 
(2,917
)
Income tax benefit
(146
)
 
(1,323
)
 
(387
)
 
(1,169
)
Income (loss) from continuing operations
703

 
(2,331
)
 
(151
)
 
(1,748
)
Loss from discontinued operations, net of tax
(2
)
 
(16
)
 
(8
)
 
(36
)
Net income (loss)
701

 
(2,347
)
 
(159
)
 
(1,784
)
Net loss (income) attributable to noncontrolling interests
43

 
39

 
(544
)
 
(339
)
Net income (loss) attributable to common shareholders
$
744

 
$
(2,308
)
 
$
(703
)
 
$
(2,123
)
 
 
 
 
 
 
 
 
Amounts attributable to common shareholders:
 

 
 

 
 
 
 
Income (loss) from continuing operations
$
746

 
$
(2,292
)
 
$
(695
)
 
$
(2,087
)
Discontinued operations
(2
)
 
(16
)
 
(8
)
 
(36
)
Net income (loss)
$
744

 
$
(2,308
)
 
$
(703
)
 
$
(2,123
)
 
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 

 
 

 
 
 
 
Continuing operations
$
0.04

 
$
(0.12
)
 
$
(0.03
)
 
$
(0.11
)
Discontinued operations
—

 
—

 
—

 
—

Net income (loss)
$
0.04

 
$
(0.12
)
 
$
(0.03
)
 
$
(0.11
)
Weighted average shares outstanding
20,124

 
19,437

 
20,100

 
19,575

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 

 
 

 
 
 
 
Continuing operations
$
0.03

 
$
(0.12
)
 
$
(0.03
)
 
$
(0.11
)
Discontinued operations
—

 
—

 
—

 
—

Net income (loss)
$
0.03

 
$
(0.12
)
 
$
(0.03
)
 
$
(0.11
)
Weighted average shares outstanding
21,815

 
19,437

 
20,100

 
19,575


The accompanying notes are an integral part of these statements
4


RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
 
2013
 
2012
 
2013
 
2012
Net income (loss)
$
701

 
$
(2,347
)
 
$
(159
)
 
$
(1,784
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on investment securities available-for-sale, net of tax of $245, $(278), $(267) and $338
2,148

 
(450
)
 
1,742

 
535

Less: reclassification for losses realized, net of tax of $83, $28, $83 and $28
131

 
46

 
131

 
46

 
2,279

 
(404
)
 
1,873

 
581

Minimum pension liability - reclassification for losses realized, net of tax of $11, $36, $48 and $71
89

 
47

 
151

 
94

 
 
 
 
 
 
 
 
Unrealized gain (loss) on hedging contracts, net of tax of $5, $71, $11 and $(3)
4

 
101

 
12

 
(28
)
Deconsolidation of LEAF- unrealized loss on hedging contracts net of tax of $0, $0, $0 and $174
—

 
—

 
—

 
255

 
4

 
101

 
12

 
227

Subtotal- other comprehensive income (loss)
2,372

 
(256
)
 
2,036

 
902

Comprehensive income (loss)
3,073

 
(2,603
)
 
1,877

 
(882
)
Comprehensive loss (income) attributable to noncontrolling interests
43

 
39

 
(544
)
 
(388
)
Comprehensive income (loss) attributable to common shareholders
$
3,116

 
$
(2,564
)
 
$
1,333

 
$
(1,270
)


The accompanying notes are an integral part of these statements
5


RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
SIX MONTHS ENDED MARCH 31, 2013
(in thousands, except shares)
(unaudited)
 
Attributable to Common Shareholders
 
 
 
 
 
 
 
Common Stock Shares
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Treasury Stock
 
Accumulated Other Comprehensive Loss
 
Total Stockholders’ Equity
 
Noncontrolling Interests
 
Total Equity
Balance, October 1, 2012
20,109,709

 
$
294

 
$
285,844

 
$
(24,508
)
 
$
(102,457
)
 
$
(13,080
)
 
$
146,093

 
$
208

 
$
146,301

Net loss
—

 
—

 
—

 
(703
)
 
—

 
—

 
(703
)
 
544

 
(159
)
Issuance of common shares
—

 
2

 
—

 
—

 
—

 
—

 
2

 
—

 
2

Treasury shares issued
17,324

 
—

 
(47
)
 
—

 
180

 
—

 
133

 
—

 
133

Stock-based compensation
215,752

 
—

 
543

 
—

 
—

 
—

 
543

 
—

 
543

Repurchases of common stock
(175,536
)
 
—

 
—

 
—

 
(1,169
)
 
—

 
(1,169
)
 
—

 
(1,169
)
Cash dividends
—

 
—

 
—

 
(1,772
)
 
—

 
—

 
(1,772
)
 
—

 
(1,772
)
Distributions
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(515
)
 
(515
)
Other comprehensive income
—

 
—

 
—

 
—

 
—

 
2,036

 
2,036

 
—

 
2,036

Balance, March 31, 2013
20,167,249

 
$
296

 
$
286,340

 
$
(26,983
)
 
$
(103,446
)
 
$
(11,044
)
 
$
145,163

 
$
237

 
$
145,400

 

The accompanying notes are an integral part of this statement
6


RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Six Months Ended
 
March 31,
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(159
)
 
$
(1,784
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
1,006

 
3,693

Provision for credit losses
5,490

 
5,212

Other-than-temporary impairment on investments
214

 
74

Unrealized gain on trading securities
(909
)
 
—

Equity in earnings of unconsolidated entities
(2,462
)
 
(228
)
Distributions from unconsolidated entities
1,727

 
2,021

Gain on sale of leases and loans
—

 
(37
)
Gain on sale of investment securities, net
(824
)
 
(63
)
Gain on sale of assets
(2,437
)
 
—

Gain on sale and deconsolidation of subsidiaries
—

 
(8,749
)
Loss on extinguishment of debt
—

 
2,190

Deferred income tax benefit
(387
)
 
(1,169
)
Equity-based compensation issued
498

 
817

Equity-based compensation received
(860
)
 
(164
)
Trading securities purchases and sales, net
1,003

 
—

Loss from discontinued operations
8

 
36

Changes in operating assets and liabilities
(501
)
 
(4,296
)
Net cash provided by (used in) operating activities
1,407

 
(2,447
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(251
)
 
(95
)
Payments received on real estate loans and real estate
2,761

 
1,550

Investments in real estate and unconsolidated real estate entities
(1,521
)
 
(503
)
Purchase of commercial finance assets
—

 
(18,483
)
Principal payments received on leases and loans
—

 
9,037

Cash divested on deconsolidation of LEAF
—

 
(2,284
)
Purchase of investments
(2,849
)
 
(736
)
Proceeds from sale of loans and investments
—

 
277

Net cash used in investing activities
(1,860
)
 
(11,237
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Increase in borrowings
2,000

 
128,845

Principal payments on borrowings
(2,340
)
 
(123,924
)
Dividends paid
(1,182
)
 
(1,135
)
Repurchase of common stock
(1,132
)
 
(955
)
Preferred stock dividends paid by LEAF to RSO
—

 
(188
)
Decrease (increase) in restricted cash
98

 
(652
)
Other
(150
)
 
(2,275
)
Net cash used in financing activities
(2,706
)
 
(284
)
CASH FLOWS FROM DISCONTINUED OPERATIONS:
 

 
 

Operating activities
(862
)
 
(569
)
Net cash used in discontinued operations
(862
)
 
(569
)
 
 
 
 
Decrease in cash
(4,021
)
 
(14,537
)
Cash, beginning of year
19,393

 
24,455

Cash, end of period
$
15,372

 
$
9,918


The accompanying notes are an integral part of these statements
7

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013
(unaudited)




NOTE 1 - NATURE OF OPERATIONS
Resource America, Inc. (the "Company") (NASDAQ: REXI) is a specialized asset management company that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its real estate, financial fund management, and commercial finance operating segments. As a specialized asset manager, the Company seeks to develop investment funds for outside investors for which the Company provides asset management services, typically under long-term management and operating arrangements either through a contract with, or as the manager or general partner of, the sponsored fund. The Company limits its investment funds to investment areas where it owns existing operating companies or has specific expertise. The Company manages assets on behalf of institutional and individual investors and Resource Capital Corp. (“RSO”) (NYSE: RSO), a diversified real estate finance company that qualifies as a real estate investment trust (“REIT”).
The consolidated financial statements and the information and tables contained in the notes to the consolidated financial statements are unaudited. However, in the opinion of management, these interim financial statements include all adjustments necessary to fairly present the results of the interim periods presented. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 2012. The results of operations for the three and six months ended March 31, 2013 may not necessarily be indicative of the results of operations for the full year ending September 30, 2013.    
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements reflect the Company's accounts and the accounts of the Company's majority-owned and/or controlled subsidiaries. The Company also consolidates entities that are variable interest entities (“VIEs”) where it has determined that it is the primary beneficiary of such entities. Once it is determined that the Company holds a variable interest in a VIE, management must perform a qualitative analysis to determine (i) if the Company has the power to direct the matters that most significantly impact the VIE's financial performance; and (ii) if the Company has the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive the benefits of the VIE that could potentially be significant to the VIE. If the Company's interest possesses both of these characteristics, the Company is deemed to be the primary beneficiary and would be required to consolidate the VIE. The Company will continually assess its involvement with VIEs and reevaluate the requirement to consolidate them. The portions of these entities that the Company does not own are presented as noncontrolling interests as of the dates and for the periods presented in the consolidated financial statements.
Variable interests in the Company's real estate segment have historically related to subordinated financings in the form of mezzanine loans or unconsolidated real estate interests. As of September 30, 2012, the Company had one such variable interest that it consolidated. The property underlying this loan was subsequently sold in November 2012 and the loan was resolved. See Note 8 for additional disclosures pertaining to VIEs.
All intercompany transactions and balances have been eliminated in the Company's consolidated financial statements.
Financing Receivables
Receivables from managed entities.  The Company performs a review of the collectability of its receivables from managed entities on a quarterly basis.  If upon review there is an indication of impairment, the Company will analyze the future cash flows of the managed entity.  With respect to the receivables from its commercial finance investment partnerships, this takes into consideration several assumptions by management, primarily concerning estimations of future bad debts and recoveries.  For the receivables from the real estate investment entities for which there are indications of impairment, the Company estimates the cash flows through the sale of the underlying properties, which is based on projected net operating income as a multiple of published capitalization rates, which is then reduced by the underlying mortgage balances and priority distributions due to the investors in the entity.
Real estate - rent receivables. The Company evaluates the collectability of the rent receivables for the properties it owns and fully reserves for amounts after they are 90 days past due. Amounts are charged off when they are deemed to be uncollectible.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


Recent Accounting Standards
Newly-Adopted Accounting Principle
The Company’s adoption of the following standard during fiscal 2013 did not have a material impact on its consolidated financial position, results of operations or cash flows:
Comprehensive income (loss). In June 2011, the Financial Accounting Standards Board ("FASB") issued an amendment to eliminate the option to present components of other comprehensive income (loss) as part of the statement of changes in stockholders' equity. The amendment requires that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income (loss) or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income (loss) and its components followed consecutively by a second statement that should present total other comprehensive income (loss), the components of other comprehensive income (loss), and the total of comprehensive income (loss). In December 2011, the FASB updated the guidance to defer the requirement related to the presentation of reclassification adjustments. This guidance became effective for the Company beginning October 1, 2012 and the Company has presented the required disclosures.
Accounting Standards Issued But Not Yet Effective
The FASB issued the following accounting standards which were not yet effective for the Company as of March 31, 2013:
Comprehensive income (loss). In February 2013, the FASB issued guidance that requires an entity to disclose information showing the effect of items reclassified from accumulated other comprehensive income on the line items of net income. The Company plans to provide the enhanced footnote disclosure as required by this amendment beginning October 1, 2013.
In March 2013, the FASB issued guidance on a parent's accounting for the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. This new guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The new guidance will be effective for the Company beginning October 1, 2013. The Company does not anticipate the adoption of this guidance will have a material impact on its consolidated financial statements.     


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


NOTE 3 – SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information (in thousands):
 
Six Months Ended
 
March 31,
 
2013
 
2012
Cash (paid) received:
 
 
 
Interest
$
(940
)
 
$
(2,696
)
Income tax payments
(924
)
 
(925
)
Refund of income taxes
84

 
—

 
 
 
 
Dividends declared per common share
$
0.06

 
$
0.06

 
 
 
 
Non-cash activities:
 

 
 

Repurchases of common stock from employees in exchange for the payment of income taxes and option exercises
$
37

 
$
101

Issuance of treasury stock for the Company's investment savings plan
181

 
338

Common stock issued to former director in exchange for vested director units
—

 
135

Effects from the deconsolidation of entities:(1)
 

 
 

Restricted cash
$
—

 
$
20,282

Receivables from managed entities and related parties, net
—

 
(3,411
)
Receivables
—

 
954

Investments in commercial finance, net
—

 
199,955

Investments in unconsolidated entities
—

 
7,049

Property and equipment, net
—

 
3,754

Deferred tax assets, net
—

 
4,558

Goodwill
—

 
7,969

Other assets
—

 
6,806

Accrued expense and other liabilities
—

 
(10,208
)
Payables to managed entities and related parties
—

 
(98
)
Borrowings
—

 
(202,481
)
Accumulated other comprehensive loss
—

 
255

Noncontrolling interests
—

 
(37,668
)
 
(1)
Reflects the deconsolidation of LEAF Commercial Capital, Inc. ("LEAF") during the three months ended December 31, 2011. As a result of the deconsolidation of this entity, the amounts noted above were removed from the Company’s consolidated balance sheets.  The sum of the assets removed and cash equated to the sum of the liabilities and equity that were similarly eliminated and, as such, there was no change in the Company’s total net assets.


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


NOTE 4 – FINANCING RECEIVABLES
The following table is the aging of the Company’s past due financing receivables (presented gross of allowance for credit losses) as of March 31, 2013 (in thousands):
 
30-89 Days
Past Due
 
Greater than
90 Days
 
Greater than
181 Days
 
Total
Past Due
 
Current
 
Total
Receivables from managed entities
    and related parties: (1)
 
 
 
 
 
 
 
 
 
 
 
Commercial finance investment entities
$
—

 
$
—

 
$
39,887

 
$
39,887

 
$
93

 
$
39,980

Real estate investment entities
1,140

 
679

 
16,368

 
18,187

 
2,317

 
20,504

Financial fund management entities
18

 
—

 
15

 
33

 
2,269

 
2,302

RSO
88

 
—

 
—

 
88

 
2,239

 
2,327

Other
21

 
—

 
—

 
21

 
100

 
121

 
1,267

 
679

 
56,270

 
58,216

 
7,018

 
65,234

Rent receivables - real estate
7

 
12

 
42

 
61

 
51

 
112

Total financing receivables
$
1,274

 
$
691

 
$
56,312

 
$
58,277

 
$
7,069

 
$
65,346

 
(1)
Receivables are presented gross of an allowance for credit losses of $32.4 million and $457,000 related to the Company’s commercial finance and financial fund management investment entities, respectively.  The remaining receivables from managed entities and related parties have no related allowance for credit losses.
The following table is the aging of the Company’s past due financing receivables (presented gross of allowance for credit losses) as of September 30, 2012 (in thousands):
 
30-89 Days
Past Due
 
Greater than
90 Days
 
Greater than
181 Days
 
Total
Past Due
 
Current
 
Total
Receivables from managed entities
   and related parties: (1)
 
 
 
 
 
 
 
 
 
 
 
Commercial finance investment entities
$
—

 
$
—

 
$
38,834

 
$
38,834

 
$
148

 
$
38,982

Real estate investment entities
784

 
2,694

 
15,180

 
18,658

 
2,091

 
20,749

Financial fund management entities
6

 
—

 
46

 
52

 
2,141

 
2,193

RSO
—

 
—

 
—

 
—

 
6,555

 
6,555

Other
—

 
—

 
—

 
—

 
152

 
152

 
790

 
2,694

 
54,060

 
57,544

 
11,087

 
68,631

Rent receivables - real estate
6

 
1

 
32

 
39

 
6

 
45

Total financing receivables
$
796

 
$
2,695

 
$
54,092

 
$
57,583

 
$
11,093

 
$
68,676

 
(1)
Receivables are presented gross of an allowance for credit losses of $25.1 million and $2.5 million related to the Company’s commercial finance and real estate investment entities, respectively.  The remaining receivables from managed entities and related parties had no related allowance for credit losses.


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


The following table summarizes the activity in the allowance for credit losses for all financing receivables (in thousands):
 
Receivables from
Managed Entities
 
Leases and Loans
 
Rent
Receivables
 
Total
Three Months Ended March 31, 2013:
 
 
 
 
 
 
 
Balance, beginning of period
$
32,560

 
$
—

 
$
68

 
$
32,628

Provision for (reversal of) credit losses
330

 
(3
)
 
11

 
338

Charge-offs
—

 
—

 
(25
)
 
(25
)
     Recoveries
16

 
3

 
—

 
19

Balance, end of period
$
32,906

 
$
—

 
$
54

 
$
32,960

 
 
 
 
 
 
 
 
Six Months Ended March 31, 2013:
 
 
 
 
 
 
 
Balance, beginning of year
$
27,580

 
$
—

 
$
33

 
$
27,613

Provision for (reversal of) credit losses
5,450

 
(6
)
 
46

 
5,490

Charge-offs
(140
)
 
—

 
(25
)
 
(165
)
     Recoveries
16

 
6

 
—

 
22

Balance, end of period
$
32,906

 
$
—

 
$
54

 
$
32,960

 
 
 
 
 
 
 


Ending balance, individually evaluated for impairment
$
32,906

 
$
—

 
$
—

 
$
32,906

Ending balance, collectively evaluated for impairment
—

 
—

 
54

 
54

Balance, end of period
$
32,906

 
$
—

 
$
54

 
$
32,960

 
 
 
 
 
 
 
 
Three Months Ended March 31, 2012:
 

 
 

 
 

 
 

Balance, beginning of period
$
12,575

 
$
—

 
$
29

 
$
12,604

Provision for (reversal of) credit losses
2,963

 
(6
)
 
5

 
2,962

Recoveries
—

 
6

 
—

 
6

Balance, end of period
$
15,538

 
$
—

 
$
34

 
$
15,572

 
 
 
 
 
 
 
 
Six Months Ended March 31, 2012:
 
 
 
 
 
 
 
Balance, beginning of year
$
10,490

 
$
430

 
$
15

 
$
10,935

Provision for credit losses
5,048

 
145

 
19

 
5,212

Charge-offs
—

 
(124
)
 
—

 
(124
)
Recoveries
—

 
31

 
—

 
31

    Deconsolidation of LEAF
—

 
(482
)
 
—

 
(482
)
Balance, end of period
$
15,538

 
$
—

 
$
34

 
$
15,572

 
 
 
 
 
 
 
 
Ending balance, individually evaluated for impairment
$
15,538

 
$
—

 
$
—

 
$
15,538

Ending balance, collectively evaluated for impairment
—

 
—

 
34

 
34

Balance, end of period
$
15,538

 
$
—

 
$
34

 
$
15,572


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


The Company’s financing receivables (presented gross of allowance for credit losses) as of March 31, 2013 relate to the balance in the allowance for credit losses, as follows (in thousands):
 
Receivables from
Managed Entities
 
Rent
Receivables
 
Total
Ending balance, individually evaluated for impairment
$
65,234

 
$
—

 
$
65,234

Ending balance, collectively evaluated for impairment
—

 
112

 
112

Balance, end of period
$
65,234

 
$
112

 
$
65,346

The Company’s financing receivables (presented gross of allowance for credit losses) as of September 30, 2012 relate to the balance in the allowance for credit losses, as follows (in thousands):
 
Receivables from
Managed Entities
 
Rent
Receivables
 
Total
Ending balance, individually evaluated for impairment
$
68,631

 
$
—

 
$
68,631

Ending balance, collectively evaluated for impairment
—

 
45

 
45

Balance, end of year
$
68,631

 
$
45

 
$
68,676

The following table discloses information about the Company’s impaired financing receivables (in thousands):
 
Net Balance
 
Unpaid Balance
 
Specific Allowance
 
Average Investment in Impaired Assets
As of March 31, 2013
 
 
 
 
 
 
 
Financing receivables with a specific valuation allowance:
 

 
 

 
 

 
 

Receivables from managed entities – commercial finance
$
5,744

 
$
38,193

 
$
32,449

 
$
38,129

Receivables from managed entities – financial fund management
848

 
1,305

 
457

 
1,305

Rent receivables – real estate
—

 
54

 
54

 
45

 
 
 
 
 
 
 
 
As of September 30, 2012
 
 
 
 
 
 
 
Financing receivables with a specific valuation allowance:
 

 
 

 
 

 
 

Receivables from managed entities – commercial finance
$
12,865

 
$
37,943

 
$
25,078

 
$
38,060

Receivables from managed entities – real estate
2,181

 
4,683

 
2,502

 
4,511

Rent receivables – real estate
12

 
45

 
33

 
45

The Company had no impaired financing receivables without a specific allowance as of March 31, 2013 and September 30, 2012.


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


NOTE 5 – INVESTMENTS IN REAL ESTATE
The Company’s investments in real estate, net, consist of the following (in thousands):
 
March 31,
2013
 
September 30,
2012
Properties owned, net of accumulated depreciation of $8,023 and $7,783:
 
 
 
Hotel property (Savannah, Georgia)
$
10,783

 
$
11,619

Office building (Philadelphia, Pennsylvania)
844

 
906

 
11,627

 
12,525

Commercial property (Elkins, West Virginia), net of accumulated depreciation
   of $0 and $784
—

 
727

Partnerships and other investments
5,476

 
5,897

Total investments in real estate, net
$
17,103

 
$
19,149

The commercial property, consolidated through a VIE, was sold in November 2012.
The contractual future minimum rental income on non-cancelable operating leases included in properties owned for each of the five succeeding annual periods ending March 31, and thereafter, are as follows (in thousands):
2014
$
858

2015
790

2016
545

2017
442

2018
373

Thereafter
414

 
$
3,422

NOTE 6 − INVESTMENT SECURITIES
Components of investment securities are as follows (in thousands):
 
March 31,
2013
 
September 30,
2012
Available-for-sale securities
$
24,411

 
$
19,468

Trading securities
3,796

 
3,064

Total investment securities, at fair value
$
28,207

 
$
22,532

Available-for-sale securities.  The following table discloses the pre-tax unrealized gains (losses) relating to the Company’s investments in available-for-sale securities (in thousands):
 
Cost or
Amortized Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
March 31, 2013:
 
 
 
 
 
 
 
Equity securities
$
34,219

 
$
155

 
$
(15,624
)
 
$
18,750

CLO securities
4,781

 
1,097

 
(217
)
 
5,661

Total
$
39,000

 
$
1,252

 
$
(15,841
)
 
$
24,411

 
 
 
 
 
 
 
 
September 30, 2012:
 

 
 

 
 

 
 

Equity securities
$
33,260

 
$
86

 
$
(17,649
)
 
$
15,697

CLO securities
2,484

 
1,302

 
(15
)
 
3,771

Total
$
35,744

 
$
1,388

 
$
(17,664
)
 
$
19,468

    

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


Equity securities.  The Company holds approximately 2.8 million shares of RSO common stock (together with options to acquire 2,166 shares at an exercise price of $15.00 per share expiring in March 2015).  The Company also holds 18,972 shares of The Bancorp, Inc. ("TBBK") common stock.  These investments are pledged as collateral for the Company’s secured corporate credit facilities. During the three months ended March 31, 2013, the Company purchased 10,000 shares of Resource Real Estate Diversified Income Fund, a new investment entity that it sponsored and manages ("RREDX"), for $100,000.
CLO securities.  The collateralized loan obligation ("CLO") securities represent the Company’s retained equity interests in seven and four CLO issuers that it directly and/or through its joint venture has structured and managed at March 31, 2013 and September 30, 2012, respectively.  The fair value of these retained interests is impacted by the fair value of the investments held by the respective CLO issuers, which are sensitive to interest rate fluctuations and credit quality determinations. The Company is required to maintain a minimum investment of $2.0 million (par value) in the subordinated notes of one of the CLO issuers, Apidos CLO II.
Trading securities.  The Company began purchasing investment securities classified as trading securities during fiscal 2012. For the three and six months ended March 31, 2013, the Company had net unrealized gains on these securities totaling $745,000 and $909,000, respectively, as well as realized gains from sales of trading securities of $516,000 and $824,000, respectively, which were included in Financial Fund Management Revenues on the consolidated statements of operations and comprehensive income (loss).
During the three and six months ended March 31, 2012, the Company sold 6,992 and 33,509 shares of TBBK stock held in a Rabbi Trust for the Supplemental Employment Retirement Plan ("SERP") for its former Chief Executive Officer and recognized net gains of $5,000 and $22,000, which were included in Other Income, Net on the consolidated statements of operations and comprehensive income (loss).
    
Unrealized losses, along with the related fair values and aggregated by the length of time the investments were in a continuous unrealized loss position, are as follows (in thousands, except number of securities):
 
 
Less than 12 Months
 
More than 12 Months
 
Fair Value
 
Unrealized
Loss
 
Number of Securities
 
Fair Value
 
Unrealized
Loss
 
Number of Securities
March 31, 2013:
 
 
 
 
 
 
 
 
 
 
 
Equity securities
$
—

 
$
—

 
—

 
$
13,120

 
$
(16,485
)
 
1

CLO securities
949

 
(217
)
 
1

 
—

 
—

 
—

Total
$
949

 
$
(217
)
 
1

 
$
13,120

 
$
(16,485
)
 
1

 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2012:
 

 
 

 
 

 
 

 
 

 
 

Equity securities
$
—

 
$
—

 
—

 
$
12,161

 
$
(17,976
)
 
1

CLO securities
1,274

 
(15
)
 
1

 
—

 
—

 
—

Total
$
1,274

 
$
(15
)
 
1

 
$
12,161

 
$
(17,976
)
 
1

The unrealized loss in RSO common stock reflected in the above table is considered to be a temporary impairment due to market factors and not reflective of credit deterioration. In making that determination, the Company considered its role as the external manager of RSO and the value of its management contract, which includes a substantial fee to the Company if it is terminated as the manager. As a consequence and because of its intent and ability to hold its investment in RSO, the Company does not consider this unrealized loss to be an other-than-temporary impairment.    
 Other-than-temporary impairment losses. In the three and six months ended March 31, 2013 and 2012, the Company recorded charges of $214,000 and $74,000, respectively, for the other-than-temporary impairment of certain of its investments in CLOs, primarily those with investments in bank loans. 


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


NOTE 7 − INVESTMENTS IN UNCONSOLIDATED ENTITIES AND LOAN MANAGER
As a specialized asset manager, the Company develops various types of investment vehicles, which it manages under long-term management agreements or similar arrangements.  The following table details the Company’s investments in these vehicles, including the range of ownership interests owned (in thousands, except percentages):
 
Range of Combined
Ownership Interests
 
March 31,
2013
 
September 30,
2012
 
 
 
Real estate investment entities
1% – 10%
 
$
8,259

 
$
8,043

Financial fund management partnerships
3% − 50%
 
4,180

 
3,983

Trapeza entities
33% − 50%
 
956

 
967

Investments in unconsolidated entities
 
 
$
13,395

 
$
12,993

In January 2013, the Company sold its 10% interest in a real estate joint venture to its partner for $3.0 million and recognized a gain of $1.6 million. The Company will continue to manage the asset and will receive property management fees in the future.
Two of the Trapeza entities that have incentive distributions, also known as carried interests, are subject to a potential clawback to the extent that such distributions exceed the cumulative net profits of the entities, as defined in the respective partnership agreements (see Note 16).  The general partner of those entities is equally owned by the Company and its co-managing partner.  Performance-based incentive fees in interim periods are recorded based upon a formula as if the contract were terminated at that date.  On a annual basis (interim measurement date), the Company quantifies the cumulative net profits/net losses (as defined under the Trapeza partnership agreements) and allocates income/loss to the limited and general partners according to the terms of such agreements.
Included in investments in unconsolidated entities is the Company's $2.2 million investment in Resource Real Estate Opportunity REIT, Inc. (“RRE Opportunity REIT”), a fund that is in the offering stage until June 2014. The Company accounts for its investment in RRE Opportunity REIT on the cost method since the Company owns less than 1% of the shares outstanding. The Company evaluates all of these investments for impairment on a quarterly basis. There were no identified events that had a significant adverse effect on these investments and, as such, no impairment has been recorded.    
Investment in Unconsolidated Loan Manager. Until the Company sold its Apidos Capital Management, LLC (“Apidos”) CLO business to CVC Capital Partners SICAV-FIS, S.A., a private equity firm (“CVC”) on April 17, 2012, the operations of Apidos were included in the Company's consolidated results. Thereafter, the Company has recorded its 33% equity share of the results of the joint venture, CVC Credit Partners, LLC ("CVC Credit Partners"), which includes the Apidos operations, in Financial Fund Management Revenues on the consolidated statements of operations and comprehensive loss. Summarized operating data for CVC Credit Partners is presented below (in thousands):
 
Three Months Ended
 
Six Months Ended
 
March 31, 2013
 
March 31, 2013
Management fee revenues
$
8,248

 
$
16,968

Costs and expenses
(6,485
)
 
(12,585
)
Net income
$
1,763

 
$
4,383

Portion of net income attributable to the Company
$
582

 
$
1,447

As a part of the transactions in forming the CVC Credit Partners joint venture, the Company received a preferred interest in Apidos (which became a subsidiary of CVC Credit Partners) relating to incentive management fees on pre-joint venture CLO's managed by Apidos. The Company accounts for this interest, with a book value of $6.8 million at March 31, 2013, on the cost method. As the incentive fees are received, in accordance with its preferred interest, the Company receives a distribution of 75% of those amounts which will initially be recorded as income, net of any contractual amounts due to third-parties. On a quarterly basis, the Company will evaluate the investment for impairment by estimating the fair value of the expected future cash flows from the incentive management fees. If the estimated fair value is less than the cost basis of the interest, the preferred interest will be deemed to be impaired. If the Company determines that the shortfall is other-than-temporary, the impairment will be recorded as a reduction of the preferred interest by reducing the revenues previously recorded on these preferred shares. To the extent that the investment in preferred equity has been reduced to zero, all subsequent distributions will be recorded as income.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


NOTE 8 − VARIABLE INTEREST ENTITIES
In general, VIEs are entities in which equity investors lack the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. The Company has variable interests in VIEs through its management contracts and investments in various securitization entities, including CDO issuers. Since the Company serves as the asset manager for the investment entities it sponsored and manages, the Company is generally deemed to have the power to direct the activities of the VIE that most significantly impact the entity's economic performance. In the case of an interest in a VIE managed by the Company, the Company will perform an additional qualitative analysis to determine if its interest (including any investment as well as any management fees that qualify as variable interests) could absorb losses or receive benefits that could potentially be significant to the VIE. This analysis considers the most optimistic and pessimistic scenarios of potential economic results that could reasonably be experienced by the VIE. Then, the Company compares the benefits it would receive (in the optimistic scenario) or the losses it would absorb (in the pessimistic scenario) as compared to all benefits and losses absorbed by the VIE in total. If the benefits or losses absorbed by the Company were significant as compared to total benefits and losses absorbed by all variable interest holders, then the Company would conclude it is the primary beneficiary.
Consolidated VIE
The following table reflects the assets and liabilities of a real estate VIE which was included in the Company’s consolidated balance sheets as of September 30, 2012 (in thousands):
 
September 30,
2012
Cash and property and equipment, net
$
727

Accrued expenses and other liabilities
189

In November 2012, the property underlying the loan was sold for a gain of $831,000 of which $793,000 was attributable to noncontrolling interests; as such, the Company will no longer consolidate the real estate VIE.
VIEs not consolidated
The Company’s investments in RSO, RRE Opportunity REIT, and its investments in the structured finance entities that hold investments in trust preferred assets (“Trapeza entities”) and asset-backed securities (“Ischus entities”), were all determined to be VIEs that the Company does not consolidate as it does not have the obligation of, or right to, losses or earnings that would be significant to those entities.  With respect to RRE Opportunity REIT, the Company has advanced offering costs that are being reimbursed as the REIT raises additional equity which is included in Receivables from managed entities and related parties, net on the consolidated balance sheets.  Except for those advances, the Company has not provided financial or other support to these VIEs and has no liabilities, contingent liabilities, or guarantees (implicit or explicit) related to these VIEs at March 31, 2013.
The following table presents the carrying amounts of the assets in the Company's consolidated balance sheets that relate to the Company's variable interests in identified non-consolidated VIEs and the Company's maximum exposure to loss associated with these VIEs in which it holds variable interests at March 31, 2013 (in thousands):
 
Receivables from
Managed Entities and
Related Parties,
Net (1)
 
Investments
 
Maximum Exposure
to Loss in
Non-consolidated VIEs
RSO
$
1,838

 
$
18,386

 
$
20,224

RRE Opportunity REIT
—

 
2,242

 
2,242

Trapeza entities
—

 
956

 
956

Ischus entities
184

 
—

 
184

 
$
2,022

 
$
21,584

 
$
23,606

 
(1)
Exclusive of expense reimbursements due to the Company.


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


NOTE 9 − ACCRUED EXPENSES AND OTHER LIABILITIES
The following is a summary of the components of accrued expenses and other liabilities (in thousands):
 
March 31,
2013
 
September 30,
2012
Accounts payable and other accrued liabilities
$
9,007

 
$
8,627

SERP liability (see Note 13)
6,630

 
6,976

Accrued wages and benefits
1,833

 
5,396

Trapeza clawback (see Note 16)
1,181

 
1,181

Real estate loan commitment
—

 
862

  Total accrued expenses and other liabilities
$
18,651

 
$
23,042

NOTE 10 – BORROWINGS
The credit facilities and other debt of the Company and related borrowings outstanding are as follows (in thousands): 
 
As of March 31, 2013
 
September 30, 2012
 
Maximum Amount
of Facility
 
Borrowings Outstanding
 
Borrowings Outstanding
Credit facilities:
 

 
 

 
 

TD Bank – secured revolving credit facility (1) 
$
6,997

 
$
—

 
$
—

Republic Bank – secured revolving credit facility
3,500

 
—

 
—

 
 

 
—

 
—

Other Debt:
 
 
 
 
 
Senior Notes
 

 
10,000

 
10,000

Note payable to RSO
 

 
1,570

 
1,677

Mortgage debt
 

 
10,425

 
10,531

Other debt
 

 
321

 
812

Total borrowings
 

 
$
22,316

 
$
23,020

 
(1)
The amount of the facility as shown has been reduced for the outstanding letter of credit of $503,000 at March 31, 2013 and September 30, 2012.
Credit Facilities
TD Bank, N.A. (“TD Bank”).  On November 19, 2012, the Company amended its agreement with TD Bank to extend the maturity of the TD Bank facility to December 31, 2014, to set the interest rate on borrowings as either (a) the prime rate of interest plus 2.25% or (b) the London Interbank Offered Rate ("LIBOR") plus 3% and to eliminate the previous floor of 6.0%. The LIBOR rate used varies from one to six months, depending upon the period of the borrowing, at the Company's election. The Company is charged an annual fee of 0.5% on the unused facility amount as well as a 5.25% fee on the $503,000 outstanding letter of credit.
Borrowings are secured by a first priority security interest in certain of the Company's assets and the guarantees of certain subsidiaries, including (i) the present and future fees and investment income earned in connection with the management of, and investments in, sponsored CDO issuers, (ii) a pledge of 18,972 shares of TBBK common stock, and (iii) the pledge of 2,080,482 shares of RSO common stock.  Availability under the facility is limited to the lesser of (a) 75% of the net present value of future RSO base management fees to be earned or (b) the maximum revolving credit facility amount.
    

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


There were no borrowings outstanding as of March 31, 2013 on the secured credit facility and the availability on the facility was $7.0 million, as reduced for outstanding letters of credit. Weighted average borrowings on the line of credit for the three and six months ended March 31, 2013 were $600,000 and $297,000 at weighted average borrowing rates of 3.2% and 3.2%, with effective interest rates (inclusive of amortization of deferred issuance costs) of 27.9% and 61.7%, respectively. Weighted average borrowings on the line of credit for the three and six months ended March 31, 2012 were $5.3 million and $5.4 million at a weighted average borrowing rate of 6.0% for both periods, with effective interest rates of 9.7% and 10.2%, respectively. Weighted average borrowings for the term note portion of the facility (which was repaid in full by the Company in November 2011) for the six months ended March 31, 2012 were $387,000 at a weighted average borrowing rate of 6.0% and an effective interest rate of 38.2%.
Republic First Bank (“Republic Bank”). In February 2011, the Company entered into a $3.5 million revolving credit facility with Republic Bank.  The facility bears interest at the prime rate of interest plus 1% with a floor of 4.5%.  The loan is secured by a pledge of 700,000 shares of RSO stock and a first priority security interest in the office building the Company owns in Philadelphia, Pennsylvania.  Availability under this facility is limited to the lesser of (a) the sum of (i) 25% of the appraised value of the office building, based upon the most recent appraisal and (ii) 100% of the cash and 75% of the market value of the pledged RSO shares held in the pledged account; and (b) 100% of the cash and 100% of the market value of the pledged RSO shares held in the pledged account.  The Company also is charged an unused annual facility fee equal to 0.25%. In October 2012, the Company amended this facility to extend the maturity date to December 28, 2014. There were no borrowings under this facility during the three and six months ended March 31, 2013 and 2012 and the availability as of March 31, 2013 was $3.5 million.
Senior Notes
In December 2012, the Company modified the terms of $10.0 million of its 9% Senior Notes that remain outstanding (following the partial repayment referred to below) to extend the maturity date from October 2013 to March 31, 2015. In connection with the modification, the Company paid a modification incentive payment equal to 1.0% of the aggregate principal amount of each note. The detachable 5-year warrants to purchase 3,690,195 shares of common stock issued with the original notes remain outstanding. The Company had accounted for these warrants as a discount to the original notes. Upon the modification and partial repayment of the Senior Notes in November 2011, the Company expensed the remaining $2.2 million of unamortized discount. The effective interest rates for the three and six months ended March 31, 2013 were 9.8% and 9.6%, respectively. The effective interest rate (inclusive of the amortization of deferred finance fees and the discount for the warrants) for the three and six months ended March 31, 2012 were 9.4% and 16.2%, respectively. Until all of the Senior Notes are paid in full, retired or repurchased, the Company cannot declare or pay future quarterly cash dividends in excess of $0.03 per share without the prior approval of all of the holders of the Senior Notes unless basic earnings per common share from continuing operations from the preceding fiscal quarter exceed $0.25 per share.
Terminated and/or Transferred Facilities and Loans
Commercial Finance Debt. The Company was not an obligor or a guarantor of these facilities and these facilities were non-recourse to the Company, except for the obligation with respect to the Series 2010-2 term securitization (see Note 16). Due to the November 2011 deconsolidation of LEAF, the Company's commercial finance debt, as follows, is no longer included in the Company's consolidated financial statements.
Securitization of leases and loans. On October 28, 2011, LEAF completed a $105.0 million securitization. A subsidiary of LEAF issued eight classes of notes which are asset-backed debt, secured and payable by certain assets of LEAF. The notes included interest rates ranging from 0.4% to 5.5%, rated by both Dominion Bond Rating Service, Inc. (“DBRS”) and Moody's Investors Services, Inc., and mature from October 2012 to March 2019. The weighted average borrowings for the period from October 1 to November 16, 2011 were $42.7 million, at a weighted average borrowing rate of 2.6% and an effective interest rate (inclusive of amortization of deferred financing costs and interest rate swaps) of 5.6%.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


Guggenheim Securities LLC (“Guggenheim”). At December 31, 2010, LEAF Financial Corporation ("LEAF Financial") had a short-term bridge loan with Guggenheim for borrowings up to $21.8 million. The bridge facility was repaid on January 4, 2011 and terminated on February 28, 2011. Beginning in January 2011, Guggenheim provided LEAF with a revolving warehouse credit facility with availability up to $110.0 million and committed to further expand the borrowing limit to $150.0 million. LEAF, through its wholly-owned subsidiary, issued to Guggenheim, as initial purchaser, six classes of DBRS-rated variable funding notes, with ratings ranging from “AAA” to “B”, for up to $110.0 million.  The notes were secured and payable only from the underlying equipment leases and loans.  Interest was calculated at a rate of 30-day LIBOR plus a margin rate applicable to each class of notes. The revolving facility ended on December 31, 2012 and the stated maturity of the notes is December 15, 2020, unless there is a mutual agreement to extend. The weighted average borrowings for the period from October 1 to November 16, 2011 (prior to the LEAF deconsolidation) were $68.8 million, at a weighted average borrowing rate of 4.2% and an effective interest rate of 5.1%.
Series 2010-2 term securitization. In May 2010, LEAF Receivables Funding 3, LLC, a subsidiary of LEAF (“LRF3”), issued $120.0 million of equipment contract-backed notes (“Series 2010-2”) to provide financing for leases and loans.  In the connection with the formation of LEAF in January 2011, RSO contributed the Series 2010-2 notes, along with the underlying lease portfolio, to LEAF. LRF3 is the sole obligor on these notes. The weighted average borrowings for the period from October 1 to November 16, 2011 were $70.1 million at a weighted average borrowing rate of 5.1% and an effective interest rate of 8.5%.
Note payable to RSO − commercial finance. On July 20, 2011, RSO entered into an agreement with LEAF pursuant to which RSO agreed to provide a $10.0 million loan to LEAF, of which $6.9 million was funded as of September 30, 2011, with additional funding of $3.1 million prior to the November 16, 2011 deconsolidation.  The loan bore interest at a fixed rate of 8.0% per annum on the unpaid principal balance, payable quarterly. The loan was secured by the commercial finance assets of LEAF and LEAF's interest in LRF3. In November 2011, RSO received $8.5 million from LEAF in payment of the outstanding balance and extinguished the loan.
Debt repayments
Annual principal payments on the Company’s aggregate borrowings for the next five fiscal years ending March 31, and thereafter, are as follows (in thousands):
2014
$
510

2015
11,771

2016
213

2017
229

2018
244

Thereafter
9,349

 
$
22,316

Covenants
The TD Bank credit facility is subject to certain financial covenants, which are customary for the type and size of the facility, including debt service coverage and debt to equity ratios. The debt to equity ratio restricts the amount of recourse debt the Company can incur based on a ratio of recourse debt to net worth.
The mortgage on the Company's hotel property contains financial covenants related to the net worth and liquid assets of the Company. Although non-recourse in nature, the loan is subject to limited standard exceptions (or “carveouts”) which the Company has guaranteed.  These carveouts will expire as the loan is paid down over the next ten years.  The Company has control over the operations of the underlying property, which mitigates the potential risk associated with these carveouts and, accordingly, no liabilities for these obligations have been recorded in the consolidated financial statements.  To date, the Company has not been required to make any carveout payments.    
The Company was in compliance with all of its financial debt covenants as of March 31, 2013.


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


NOTE 11 – ACCUMULATED OTHER COMPREHENSIVE LOSS
Included in Accumulated Other Comprehensive Loss as of September 30, 2012 were net unrealized losses of $9,000 (net of tax benefit of $6,000) related to hedging instruments held by the investment funds sponsored by LEAF Financial, in which the Company owns an equity interest. In addition, at March 31, 2013 and September 30, 2012, the Company had a net unrealized loss of $10,000 (net of tax benefit of $2,000) and $13,000 (net of tax benefit of $9,000), respectively, included in Accumulated Other Comprehensive Loss for the hedging activity of LEAF. The Company has no other hedging activity as of March 31, 2013.
The following are changes in accumulated other comprehensive loss by category (in thousands):
 
Investment Securities
Available-for-Sale
 
Cash Flow Hedges
 
SERP Pension
Liability
 
Total
Balance, September 30, 2012, net of tax of $(6,263), $(15) and $(2,328)
$
(10,013
)
 
$
(22
)
 
$
(3,045
)
 
$
(13,080
)
Changes during fiscal 2013
1,873

 
12

 
151

 
2,036

Balance, March 31, 2013, net of tax of $(6,447), $(2), and $(2,279)
$
(8,140
)
 
$
(10
)
 
$
(2,894
)
 
$
(11,044
)
NOTE 12 – EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share (“Basic EPS”) is computed using the weighted average number of common shares outstanding during the period, inclusive of nonvested share-based awards that are entitled to receive non-forfeitable dividends.  The diluted earnings (loss) per share (“Diluted EPS”) computation takes into account the effect of potential dilutive common shares.  Potential common shares, consisting primarily of outstanding stock options, warrants and director deferred shares, are calculated using the treasury stock method.
The following table presents a reconciliation of the shares used in the computation of Basic EPS and Diluted EPS (in thousands):
 
Three Months Ended
 
March 31, 2013
Shares
 
Basic shares outstanding
20,124

Dilutive effect of outstanding stock options, warrants and director units
1,691

Dilutive shares outstanding
21,815

 For periods with reported net losses, the Basic EPS and Diluted EPS shares were the same because of the antidilutive impact of potentially dilutive securities.  Accordingly, the following securities were excluded from the Diluted EPS computation as of March 31, 2013 and 2012: outstanding options to purchase 955,000 and 1.0 million shares of common stock, respectively, (at weighted average exercise prices per share of $16.88 and $16.27, respectively) and warrants to purchase 3,690,000 shares of common stock (exercise price per share of $5.10).
NOTE 13 - BENEFIT PLANS
Supplemental Employment Retirement Plan ("SERP"). The Company established a SERP, which has Rabbi and Secular Trust components, for Mr. Edward E. Cohen (“Mr. E. Cohen”), while he was the Company’s Chief Executive Officer ("CEO").  The Company pays an annual benefit equal to $838,000 during his lifetime or for a period of 10 years from June 2004, whichever is longer.  The components of net periodic benefit costs for the SERP were as follows (in thousands):

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


 
For the Three Months Ended
March 31,
 
For the Six Months Ended
March 31,
 
2013
 
2012
 
2013
 
2012
Interest cost
$
60

 
$
80

 
$
119

 
$
160

Less: expected return on plan assets
(24
)
 
(17
)
 
(47
)
 
(35
)
Plus: Amortization of unrecognized loss
100

 
82

 
200

 
165

Net benefit cost
$
136

 
$
145

 
$
272

 
$
290

NOTE 14 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In the ordinary course of its business operations, the Company has sponsored and manages investment entities.  Additionally, it has ongoing relationships with several related entities.  The following table details these receivables and payables (in thousands):
 
March 31,
2013
 
September 30,
2012
Receivables from managed entities and related parties, net:
 
 
 
Real estate investment entities
$
20,504

 
$
18,247

Commercial finance investment entities (1) 
7,531

 
13,904

Financial fund management investment entities
1,845

 
2,193

RSO
2,327

 
6,555

Other
121

 
152

Receivables from managed entities and related parties
$
32,328

 
$
41,051

 
 
 
 
Payables due to managed entities and related parties, net:
 

 
 

Real estate investment entities (2) 
$
2,917

 
$
3,900

Other
243

 
480

Payables to managed entities and related parties
$
3,160

 
$
4,380

 
(1)
Includes $32.4 million of reserves for credit losses related to management fees owed from three commercial finance investment entities that, based on changes in the estimated cash distributions, are not expected to be collectible.
(2)
Includes $2.6 million in funds provided by the real estate investment entities, which are held by the Company to self insure the properties held by those entities.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


The Company receives fees, dividends and reimbursed expenses from several related/managed entities.  In addition, the Company reimburses related entities for certain operating expenses.  The following table details those activities (in thousands):
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
2013
 
2012
 
2013
 
2012
Fees from unconsolidated investment entities:
 
 
 
 
 
 
 
Real estate (1) 
$
4,252

 
$
4,689

 
$
8,269

 
$
8,457

Financial fund management 
748

 
853

 
1,508

 
1,703

Commercial finance (2) 
—

 
—

 
—

 
—

RSO:
 

 
 

 
 

 
 
Management, incentive and other fees
2,746

 
3,510

 
7,595

 
7,340

Dividends paid
556

 
505

 
1,090

 
1,136

Reimbursement of costs and expenses
1,214

 
892

 
2,374

 
1,597

CVC Credit Partners – reimbursement of costs and expenses
377

 
—

 
593

 
—

RRE Opportunity REIT:
 
 
 
 
 
 
 
Reimbursement of costs and expenses
204

 
530

 
279

 
635

Dividends paid
33

 
—

 
33

 
—

LEAF:
 
 
 
 
 
 
 
Payment for sub-servicing the commercial finance investment
    partnerships
(303
)
 
(706
)
 
(685
)
 
(1,111
)
Payment for rent and related expenses
(199
)
 
(184
)
 
(396
)
 
(304
)
Reimbursement of costs and expenses
57

 
82

 
116

 
142

1845 Walnut Associates Ltd. – payment of rent and operating expenses
(157
)
 
(208
)
 
(311
)
 
(314
)
Brandywine Construction & Management, Inc. – payment for
    property management fees for the hotel property
(43
)
 
(39
)
 
(97
)
 
(98
)
Atlas Energy, L.P. – reimbursement of costs and expenses
141

 
149

 
285

 
318

Ledgewood P.C. – payment for legal services 
(61
)
 
(114
)
 
(114
)
 
(269
)
Graphic Images, LLC – payment for printing services
(24
)
 
(94
)
 
(51
)
 
(102
)
The Bancorp, Inc. – reimbursement of costs and expenses
28

 
29

 
56

 
74

9 Henmar, LLC – payment of broker/consulting fees 
(3
)
 
(4
)
 
(22
)
 
(22
)
 
(1)
Includes discounts recorded by the Company of $133,000 and $614,000 recorded in the three months and six month ended March 31, 2013, respectively, and $52,000 and $128,000 in the three and six months ended March 31, 2012, in connection with management fees from its real estate investment entities that are expected to be received in future periods.
(2)
During the three and six months ended March 31, 2013, the Company waived $618,000 and $1.4 million, respectively, and $1.2 million and $2.7 million during the three and six months ended March 31, 2012 , respectively, of fund management fees from its commercial finance investment entities.
Purchases of related party trading securities. The Company engages in structured finance security trading, both as an agent, through the Company's registered broker-dealer subsidiary, Resource Securities, Inc. ("Resource Securities"), and for the Company. During the six months ended March 31, 2013, the Company purchased and sold $5.9 million notional value of notes of Alesco Financial, Inc. ("Alesco") for $239,000 and recognized gain of $121,000. Alesco merged with Cohen & Company, Inc. in December 2009 and subsequently changed its name to Institutional Financial Markets, Inc. ("IFMI"). Mr. Daniel G. Cohen, the brother of the Company's Chief Executive Officer, Mr. Jonathan Z. Cohen, and the son of Mr. E. Cohen, the Company's Chairman, is the Chief Executive Officer and Chief Investment Officer of IFMI.
Relationship with Brandywine Construction & Management, Inc. (“BCMI”).  BCMI manages the property underlying one of the Company’s real estate investments.  Mr. E. Cohen is the chairman of BCMI.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


In November 2012, the Company paid a $95,000 fee to BCMI in connection with the negotiations, for and ultimate sale of, a property in which the Company had a loan investment.
Advances to Affiliated Real Estate Limited Partnership. During fiscal 2012, the Company agreed to advance up to $3 million to an affiliated real estate limited partnership under a revolving note, bearing interest at the prime rate.  Amounts drawn, which are due upon demand, were $2.5 million and $2.4 million as of March 31, 2013 and September 30, 2012, respectively, and are included in Receivables from managed entities and related parties. The Company recorded $18,000 and $36,000 of interest income on this loan during the three and six months ended March 31, 2013, respectively, and $16,000 and $32,000 during the three and six months ended March 31, 2012, respectively.
NOTE 15 – FAIR VALUE
In analyzing the fair value of its assets and liabilities accounted for on a fair value basis, the Company follows the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities are categorized into one of three levels based on the assumptions (inputs) used in valuing the asset or liability. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are defined as follows:
Level 1 − Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date. 
Level 2 − Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
Level 3 − Unobservable inputs that reflect the entity's own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and that are, consequently, not based on market activity, but upon particular valuation techniques.
There were no transfers between any of the Levels within the fair value hierarchy for any of the periods presented.
The following is a discussion of the assets and liabilities that are recorded at fair value on a recurring and non-recurring basis, as well as the valuation techniques applied to each fair value measurement and the estimates and assumptions used by the Company in those measurements.
Receivables from managed entities. The Company recorded a discount on certain of its receivable balances due from its real estate and commercial finance managed entities due to the extended term of the repayment to the Company. The discount was computed based on estimated inputs, including the repayment term (Level 3).
For the real estate managed entity receivables, the Company assumes the fair value of the real estate investment funds through the sale of the underlying properties. The net proceeds are applied first to the payoff of the lenders and then to the payment of distributions due to investors; any balance remaining is then available to repay the amounts due to the Company. The balance sheet date fair values of the properties are individually calculated based on capitalized net operating income, which are derived from capitalization rates from a third-party research firm (for the region in which the properties are located, based on actual sales data for properties sold during the past year) as applied to the Company's internally-generated projected operating results for each of the respective properties. These projections are historically based on and are adjusted for current trends in the marketplace and specific changes as applicable by property.
With respect to the commercial finance partnership receivables, management projects the availability of excess cash flow at the individual investment entity to repay the Company's receivable. In determining the excess cash flow, management starts with the gross future payments due on leases and loans for each of the funds, which are fixed and determinable, net of debt service and expected credit losses, which are estimated based on a migration analysis which is calculated based on historical data across the entire portfolio of leases and loans. This analysis estimates the likelihood that an account will progress through delinquency stages to ultimate charge-off. After an account becomes 180 or more days past due, any remaining balance is fully reserved, less an estimated recovery amount based on historical trends (currently estimated at 12.4%). Cash is first applied to the payoff of the underlying principal and interest on debt used to purchase the portfolios. The projected cash flows also take into consideration the receipt of other income (such as late fees or residual gains), the payment of general and administrative expenses of the funds and distributions to limited partners. The remaining excess cash is then available to repay the amounts due to the Company.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


Investment securities − equity securities. The Company uses quoted market prices (Level 1) to value its investments in RSO, TBBK and RREDX common stock.
Investment securities − trading securities. The Company uses third-party valuations and dealer quotes or bids to estimate the fair value of its trading securities (Level 3).
Investment securities − CLO securities. The fair value of CLO securities is based on internally generated expected cash flow models that require significant management judgments and estimates due to the lack of market activity and unobservable pricing inputs. Unobservable inputs into these models include default, recovery, discount and deferral rates, prepayment speeds and reinvestment interest spreads (Level 3).
The significant unobservable inputs used in the fair value measurement of the Company's CLO securities are prepayment rates, probability of default, loss severity rate, reinvestment price on underlying collateral and the discount rate. Significant increases (decreases) in the default or discount rates in isolation would result in a significantly lower (higher) fair value measurement, whereas significant increases (decreases) in the recovery rate, prepayment rate or reinvestment price in isolation would result in a significantly higher (lower) fair value measurement.  Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the discount rate and a directionally opposite change in the assumption used for prepayment rates, recovery rates and reinvestment prices on underlying collateral. 
Investment in real estate. During fiscal 2012, the Company received an offer for the sale of one of its assets included in Investments in Real Estate. The offer was below the book value of the asset and, accordingly, the Company recorded an impairment charge during fiscal 2012 (Level 2). The property was subsequently sold in November 2012.
Investment in real estate - office building. The Company's investment in an office building, located in Philadelphia, Pennsylvania was determined to be impaired during fiscal 2012. The Company determined the fair value of the building using an estimate of the loan to value based on stabilized projected cash flows (Level 3).
Investment in CVC Credit Partners. The Company utilized a third-party valuation firm to value its investment in CVC Credit Partners and its preferred interest as of its formation on April 17, 2012. The joint venture investment was valued at $28.6 million based on the weighted average of several calculations, including implied transaction, dividend discount, discounted cash flow, and guideline public company models. The valuation models required assumptions and estimates of many critical factors, including revenue and market growth, operating cash flows, market multiples, and discount rates, which took into consideration the current economic environment and credit market conditions (Level 3).
Investment in Apidos-CVC preferred interest and contractual commitment. The Company's preferred interest in Apidos-CVC, initially valued at $6.8 million, as well as the corresponding contractual commitment valued at $589,000, were both based on the present value of the underlying discounted projected cash flows of the legacy Apidos incentive management fees (Level 3).
Investment in LEAF. The Company's investment in LEAF, also based on a third-party valuation, was valued at $1.7 million as of its formation. The valuation utilized several approaches, including discounted expected cash flows, market approach and comparable sales transactions. These approaches required assumptions and estimates of many critical factors, including revenue and market growth, operating cash flows, market multiples, and discount rates, which were based on the current economic environment and credit market conditions (Level 3).
As of March 31, 2013, the fair values of the Company’s assets recorded at fair value on a recurring basis were as follows (in thousands): 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Investment securities
$
18,750

 
$
—

 
$
9,457

 
$
28,207

As of September 30, 2012, the fair values of the Company’s assets recorded at fair value on a recurring basis were as follows (in thousands): 

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Investment securities
$
15,697

 
$
—

 
$
6,835

 
$
22,532

The following table presents additional information about assets which were measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value during the six months ended March 31, 2013 (in thousands):
 
Investment Securities
Balance, beginning of year
$
6,835

Purchases
8,013

Income accreted
449

Payments and distributions received
(3,333
)
Impairment recognized in earnings
(214
)
Sales
(3,620
)
Gain on sales of trading securities
824

Unrealized holding gain on trading securities
909

Change in unrealized losses included in accumulated other comprehensive loss
(406
)
Balance, end of period
$
9,457

The following table presents additional information about assets which were measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value during fiscal 2012 (in thousands):
 
Investment Securities
 
Retained Financial Interest
Balance, beginning of year
$
2,356

 
$
22

Purchases
7,570

 
—

Income accreted
823

 
—

Payments and distributions received
(2,827
)
 
—

Sales
(2,999
)
 
—

Impairment recognized in earnings
(74
)
 
—

Gains on sales of trading securities
909

 
—

Unrealized holding gain on trading securities
1,108

 
—

Deconsolidation of LEAF
—

 
(22
)
Change in unrealized losses included in accumulated other comprehensive loss
(31
)
 
—

Balance, end of year
$
6,835

 
$
—

The following table presents the Company's quantitative inputs and assumptions used in determining the fair value of items categorized in Level 3 (in thousands, except percentages):
 
Fair Value at
March 31, 2013
 
Valuation Technique
 
Unobservable Inputs
 
Weighted
Average
Assumptions
CLO securities
$
5,661

 
Discounted cash flow
 
Constant default rate
 
2%
 
 
 
 
 
Loss severity rate
 
30%
 
 
 
 
 
Constant prepayment rate- year one
 
40%
 
 
 
 
 
Constant prepayment rate- year two
 
30%
 
 
 
 
 
Constant prepayment rate - periods thereafter
 
25%
 
 
 
 
 
Reinvestment price on collateral
 
100%
 
 
 
 
 
Discount rates
 
13.5% - 20%
Investment securities - trading securities. Since the Company uses third-party dealer marks to estimate the fair value of its non-marketable trading securities owned, the valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of March 31, 2013 have not been provided.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


The Company recognized the following changes in carrying value of the assets and liabilities measured at fair value on a non-recurring basis, as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Six Months Ended March 31 , 2013:
 
 
 
 
 
 
 
Asset:
 
 
 
 
 
 
 
Receivables from managed entities – commercial finance, real estate and financial fund management
$
—

 
$
—

 
$
10,047

 
$
10,047

Liability:
 

 
 

 
 

 
 

Apidos contractual commitment
$
—

 
$
—

 
$
998

 
$
998

 
 
 
 
 
 
 
 
Fiscal Year Ended September 30, 2012:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Receivables from managed entities – commercial finance and real estate
$
—

 
$
—

 
$
16,752

 
$
16,752

Investment in real estate
—

 
727

 
—

 
727

Investment in real estate - office building
—

 
—

 
906

 
906

Investment in CVC Credit Partners
—

 
—

 
28,600

 
28,600

Investment in Apidos-CVC preferred interest
—

 
—

 
6,792

 
6,792

Investment in LEAF
—

 
—

 
1,749

 
1,749

Total
$
—

 
$
727

 
$
54,799

 
$
55,526

Liability:
 

 
 

 
 

 
 

Apidos contractual commitment
$
—

 
$
—

 
$
589

 
$
589

The fair value of financial instruments required to be disclosed at fair value, excluding instruments valued on a recurring basis, is as follows (in thousands):

March 31, 2013
 
September 30, 2012
 
Carrying Amount
 
Estimated Fair Value
 
Carrying Amount
 
Estimated Fair Value
Assets:
 
 
 
 
 
 
 
Receivables from managed entities
$
32,328

 
$
32,328

 
$
41,051

 
$
41,051

 
$
32,328

 
$
32,328

 
$
41,051

 
$
41,051

Borrowings:
 

 
 

 
 

 
 

Real estate debt
$
10,425

 
$
11,616

 
$
10,531

 
$
11,554

Senior Notes
10,000

 
12,066

 
10,000

 
11,364

Other debt
1,891

 
1,869

 
2,489

 
2,491

 
$
22,316

 
$
25,551

 
$
23,020

 
$
25,409

For cash, receivables and payables, the carrying amounts approximate fair value because of the short-term maturity of these instruments.
The Company estimated the fair value of the real estate debt using current interest rates for similar loans. The Company estimated the fair value of the Senior Notes by applying the percentage appreciation in a high-yield fund with approximately similar quality and risk attributed to the Senior Notes. The carrying value of the Company's other debt was estimated using current interest for similar loans at March 31, 2013 and September 30, 2012.


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


NOTE 16 - COMMITMENTS AND CONTINGENCIES
LEAF lease valuation commitment. In conjunction with the third-party equity investment in LEAF, the Company and RSO have undertaken a contingent obligation with respect to the value of the equity on the balance sheet of LRF3. To the extent that the value of the equity on the balance sheet of LRF3 is less than $18.7 million (the value of the equity of LRF3 on the date it was contributed by RSO to LEAF), as of the final testing date within 90 days of December 31, 2013, the Company and RSO have agreed to be jointly and severally obligated to contribute cash to LEAF to the extent of any shortfall. The LRF3 equity as of March 31, 2013 was in excess of this commitment and, therefore, the Company was not required to record a liability with respect to this obligation.
Limited loan guarantee. The Company and two of its commercial finance investment partnerships, Lease Equity Appreciation Fund I, L.P. (“LEAF I”) and Lease Equity Appreciation Fund II, L.P. (“LEAF II”), have provided a limited guarantee to a lender to the LEAF partnerships in exchange for a waiver of any existing defaulted loan covenants and certain future financial covenants. The loans mature at the earlier of (a) the maturity date (March 20, 2014 for LEAF I and December 21, 2013 for LEAF II), or (b) the date on which an event of default under the loan agreement occurs. The maximum guarantee provided by the Company is up to $7.3 million ($2.3 million for LEAF I and $5.0 million for LEAF II). If the Company were required to make any such payments under the guarantee in the future, it would have the option to either step in as the lender or otherwise make a capital contribution to the LEAF partnerships for the amount of the required guarantee payment. Under certain circumstances, the lender will also discount its loans by approximately $250,000 for LEAF I and $347,500 for LEAF II. Management has determined that, based on projected cash flows from the underlying lease and loan portfolios collateralizing the loans, there should be sufficient funds to repay the LEAF partnerships' outstanding loan balances and, accordingly, the Company was not required to record a liability with respect to the guarantee.
Broker-Dealer Capital Requirement.  Resource Securities serves as a dealer-manager for the sale of securities of direct participation investment programs, both public and private, sponsored by subsidiaries of the Company who also serve as general partners and/or managers of these programs.  Additionally, Resource Securities serves as an introducing agent for transactions involving sales of securities of financial services companies, REITs and insurance companies for the Company and for RSO.  As a broker-dealer, Resource Securities is required to maintain minimum net capital, as defined in regulations under the Securities Exchange Act of 1934, as amended, which was $125,000 and $100,000 as of March 31, 2013 and September 30, 2012, respectively.  As of March 31, 2013 and September 30, 2012, Resource Securities net capital was $623,000 and $447,000, respectively, which exceeded the minimum requirements by $498,000 and $347,000, respectively.
Clawback liability.  On November 1, 2009 and January 28, 2010, the general partners of two of the Trapeza entities, which are owned equally by the Company and its co-managing partner, repurchased substantially all of the remaining limited partnership interests in the two Trapeza entities with potential clawback liabilities for $4.4 million.  The Company contributed $2.2 million (its 50% share).  The clawback liability was $1.2 million at March 31, 2013 and September 30, 2012.
Legal proceedings. In September 2011, First Community Bank, (“First Community”) filed a complaint against First Tennessee Bank and approximately thirty other defendants consisting of investment banks, rating agencies, collateral managers, including Trapeza Capital Management, LLC (“TCM”), and issuers of CDOs, including Trapeza CDO XIII, Ltd. and Trapeza CDO XIII, Inc. TCM and the Trapeza CDO issuers are collectively referred to as Trapeza. The complaint includes causes of action against TCM for fraud, negligent misrepresentation, violation of the Tennessee Securities Act of 1980 and unjust enrichment. First Community alleges, among other things, that it invested in certain CDOs, that the defendant rating agencies assigned inflated investment grade ratings to the CDOs, and that the defendant investment banks, collateral managers and issuers (including Trapeza) fraudulently and/or negligently made “materially false and misleading representations and omissions” that First Community relied on in investing in the CDOs, including both written representations in offering materials and unspecified oral representations. Specifically, with respect to Trapeza, First Community alleges that it purchased $20 million of notes in the D tranche of the Trapeza CDO XIII transaction from J.P. Morgan. The Court dismissed this matter in June 2012. First Community filed a Notice of Appeal in July 2012.
The Company is also a party to various routine legal proceedings arising out of the ordinary course of business. Management believes that none of these actions, individually or, in the aggregate, will have a material adverse effect on the Company's consolidated financial condition or operations.
    

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


Real estate commitments.  As a specialized asset manager, the Company sponsors and manages investment funds in which it may make an equity investment along with outside investors.  This equity investment is generally based on a percentage of funds raised and varies among investment programs.  With respect to RRE Opportunity REIT, the Company is committed to invest 1% of the equity raised to a maximum amount of $2.5 million. This commitment has been reduced to $262,000 as of March 31, 2013 as a result of funds already invested to date.    
In July 2011, the Company entered into an agreement with one of the tenant-in-common ("TIC") real estate programs it sponsored and manages.  This agreement requires the Company to fund up to $1.9 million for capital improvements for the TIC property over the next two years.  The Company has advanced funds totaling $1.7 million as of March 31, 2013, which is included in Investments in real estate on the consolidated balance sheets.
The liabilities for the real estate commitments will be recorded in the future as amounts become due and payable.
General corporate commitments. The Company is also party to employment agreements with certain executives that provide for compensation and other benefits, including severance payments under specified circumstances.
     As of March 31, 2013, except for the clawback liability recorded for the two Trapeza entities and executive compensation, the Company did not believe it was probable that any payments would be required under any of its commitments and contingencies and, accordingly, no liabilities for these obligations were recorded in the consolidated financial statements.

NOTE 17 - OPERATING SEGMENTS
The Company’s operations include three reportable operating segments that reflect the way the Company manages its operations and makes business decisions.  In addition to its reporting operating segments, certain other activities are reported in the “all other” category.  Summarized operating segment data are as follows (in thousands):
 
Real Estate
 
Financial Fund Management
 
Commercial Finance
 
All Other (1)
 
Total
Three Months Ended March 31, 2013:
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
11,320

 
$
2,868

 
$
—

 
$
—

 
$
14,188

Equity in earnings (losses) of unconsolidated entities
20

 
1,419

 
(178
)
 
—

 
1,261

Total revenues
11,340

 
4,287

 
(178
)
 
—

 
15,449

Segment operating expenses
(9,440
)
 
(2,528
)
 
(45
)
 
—

 
(12,013
)
General and administrative expenses
(1,404
)
 
9

 
—

 
(762
)
 
(2,157
)
Provision for credit losses
2,522

 
—

 
(2,860
)
 
—

 
(338
)
Depreciation and amortization
(230
)
 
(20
)
 
—

 
(166
)
 
(416
)
Other-than-temporary impairment on investments
—

 
(214
)
 
—

 
—

 
(214
)
Interest expense
(197
)
 
—

 
(1
)
 
(296
)
 
(494
)
Other income (expense), net
297

 
589

 
6

 
(152
)
 
740

Pretax loss attributable to noncontrolling interests (2)
43

 
—

 
—

 
—

 
43

Income (loss) from continuing operations excluding noncontrolling interest before taxes
$
2,931

 
$
2,123

 
$
(3,078
)
 
$
(1,376
)
 
$
600



RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


 
Real Estate
 
Financial Fund Management
 
Commercial Finance
 
All Other (1)
 
Total
Six Months Ended March 31, 2013:
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
24,453

 
$
4,239

 
$
—

 
$
—

 
$
28,692

Equity in earnings (losses) of unconsolidated entities
41

 
2,723

 
(302
)
 
—

 
2,462

Total revenues
24,494

 
6,962

 
(302
)
 
—

 
31,154

Segment operating expenses
(17,438
)
 
(3,545
)
 
4

 
—

 
(20,979
)
General and administrative expenses
(1,487
)
 
(569
)
 
—

 
(2,357
)
 
(4,413
)
Provision for credit losses
2,332

 
(457
)
 
(7,365
)
 
—

 
(5,490
)
Depreciation and amortization
(538
)
 
(42
)
 
—

 
(328
)
 
(908
)
Other-than-temporary impairment on investments
—

 
(214
)
 
—

 
—

 
(214
)
Interest expense
(409
)
 
—

 
(1
)
 
(606
)
 
(1,016
)
Other income (expense), net
460

 
1,112

 
6

 
(250
)
 
1,328

Pretax income attributable to noncontrolling interests (2)
(822
)
 
—

 
—

 
—

 
(822
)
Income (loss) from continuing operations excluding noncontrolling interests before taxes
$
6,592

 
$
3,247

 
$
(7,658
)
 
$
(3,541
)
 
$
(1,360
)


 
Real Estate
 
Financial Fund Management
 
Commercial Finance
 
All Other (1)
 
Total
Three Months Ended March 31, 2012:
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
9,681

 
$
5,428

 
$
—

 
$
—

 
$
15,109

Equity in earnings (losses) of unconsolidated entities
35

 
876

 
(1,240
)
 
—

 
(329
)
Total revenues
9,716

 
6,304

 
(1,240
)
 
—

 
14,780

Segment operating expenses
(7,407
)
 
(4,379
)
 
(230
)
 
—

 
(12,016
)
Restructuring expenses
—

 
—

 
—

 
(365
)
 
(365
)
General and administrative expenses
(94
)
 
(604
)
 
—

 
(1,769
)
 
(2,467
)
Provision for credit losses
(103
)
 
—

 
(2,859
)
 
—

 
(2,962
)
Depreciation and amortization
(324
)
 
(37
)
 
—

 
(174
)
 
(535
)
Gain on sale of investment securities, net
—

 
—

 
—

 
5

 
5

Other-than-temporary impairment losses recognized in earnings
—

 
(74
)
 
—

 
—

 
(74
)
Interest expense
(213
)
 
—

 
(36
)
 
(396
)
 
(645
)
Other income (expense), net
129

 
538

 
—

 
(42
)
 
625

Pretax loss attributable to noncontrolling interests (2)
39

 
—

 
—

 
—

 
39

Income (loss) from continuing operations excluding noncontrolling interest before taxes
$
1,743

 
$
1,748

 
$
(4,365
)
 
$
(2,741
)
 
$
(3,615
)



RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


 
Real Estate
 
Financial Fund Management
 
Commercial Finance
 
All Other (1)
 
Total
Six Months Ended March 31, 2012:
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
17,741

 
$
11,341

 
$
4,134

 
$
—

 
$
33,216

Equity in earnings (losses) of unconsolidated entities
641

 
1,542

 
(1,955
)
 
—

 
228

Total revenues
18,382

 
12,883

 
2,179

 
—

 
33,444

Segment operating expenses
(14,599
)
 
(10,183
)
 
(2,193
)
 
—

 
(26,975
)
Restructuring expenses
—

 
—

 
—

 
(365
)
 
(365
)
General and administrative expenses
(172
)
 
(1,473
)
 
—

 
(3,718
)
 
(5,363
)
Gain on sale of leases and loans
—

 
—

 
37

 
—

 
37

Provision for credit losses
(207
)
 
—

 
(5,005
)
 
—

 
(5,212
)
Depreciation and amortization
(647
)
 
(74
)
 
(1,556
)
 
(319
)
 
(2,596
)
Gain on deconsolidation of subsidiary
—

 
—

 
8,749

 
—

 
8,749

Loss on extinguishment of debt
—

 
—

 
—

 
(2,190
)
 
(2,190
)
Gain on sale of investment securities, net
—

 
41

 
—

 
22

 
63

Other-than-temporary impairment on investments
—

 
(74
)
 
—

 
—

 
(74
)
Interest expense
(428
)
 
—

 
(1,727
)
 
(1,464
)
 
(3,619
)
Other income (expense), net
246

 
1,115

 
—

 
(177
)
 
1,184

Pretax loss (income) attributable to noncontrolling interests (2)
14

 
—

 
(224
)
 
—

 
(210
)
Income (loss) excluding noncontrolling interests before intercompany interest expense and taxes
2,589

 
2,235

 
260

 
(8,211
)
 
(3,127
)
Intercompany interest (expense) income
—

 
—

 
(29
)
 
29

 
—

Income (loss) from continuing operations excluding noncontrolling interest before taxes
$
2,589

 
$
2,235

 
$
231

 
$
(8,182
)
 
$
(3,127
)

 
Real Estate
 
Financial Fund Management
 
Commercial Finance
 
All Other (1)
 
Total
Segment assets
 

 
 

 
 

 
 

 
 

March 31, 2013
$
171,843

 
$
77,621

 
$
8,507

 
$
(68,444
)
 
$
189,527

March 31, 2012
164,897

 
30,685

 
26,407

 
(53,497
)
 
168,492

 
(1)
Includes general corporate expenses and assets not allocable to any particular segment.
(2)
In viewing its segment operations, management excludes the pretax (income) loss attributable to noncontrolling interests.  However, these interests are included from (loss) income from operations as computed in accordance with U.S. GAAP and should be deducted to compute (loss) income from operations as reflected in the Company’s consolidated statements of operations.
Geographic information.  There were no revenues generated from the Company's European operations during the three and six months ended March 31, 2013 and 2012. Included in segment assets as of March 31, 2013 and 2012 were $585,000 and $855,000, respectively, of European assets.
Major customer.  During the three months and six ended March 31, 2013, the total of management, incentive and other fees that the Company received from RSO were 18% and 24%. RSO fees represented 24% and 22% for the three and six months ended March 31, 2012, respectively, of the Company's total consolidated revenues.  These fees have been reported as revenues by each of the Company’s operating segments.
NOTE 18 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events and determined that no events have occurred which would require an adjustment to the consolidated financial statements.


ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
We are a specialized asset management company that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through our real estate, financial fund management and commercial finance subsidiaries as well as our joint ventures. As a specialized asset manager, we seek to develop investment funds for outside investors for which we provide asset management services, typically under long-term management arrangements either through a contract with, or as the manager or general partner of, our sponsored investment funds. We typically maintain an investment in the funds we sponsor. As of March 31, 2013, we managed $15.3 billion of assets.
We limit our fund development and management services to asset classes where we own existing operating companies or have specific expertise. We believe this strategy enhances the return on investment we can achieve for our funds. In our real estate operations, we concentrate on the ownership, operation and management of multifamily and commercial real estate and real estate mortgage loans including whole mortgage loans, first priority interests in commercial mortgage loans, known as A notes, subordinated interests in first mortgage loans, known as B notes, mezzanine loans, investments in discounted and distressed real estate loans and investments in “value-added” properties (properties which, although not distressed, need substantial improvements to reach their full investment potential). In our financial fund management operations, we concentrate on bank loans, trust preferred securities of banks, bank holding companies, insurance companies and other financial companies, and asset backed securities, or ABS.
In our real estate segment, we have focused our efforts primarily on acquiring and managing a diversified portfolio of commercial real estate and real estate related debt that has been significantly discounted due to the effects of current economic conditions and high levels of leverage. We expect to continue to expand this business by raising investor funds through our retail broker channel for investment programs, principally through Resource Real Estate Opportunity REIT, Inc., which we refer to as RRE Opportunity REIT.
During the three months ended March 31, 2013, we launched Resource Real Estate Diversified Income Fund , or RREDX, a publicly-offered, diversified, closed-end management investment company. Its focus will be to invest at least 80% of assets in real estate and real estate related industry securities, primarily in income-producing equity and debt securities. We purchased 10,000 shares of RREDX during the quarter for $100,000.
In our financial fund management segment, our recent focus has primarily been the sponsorship and management of collateralized debt and loan obligations, or CDOs and CLOs. In addition, on April 17, 2012, we completed the sale of 100% of our equity interests in Apidos Capital Management, LLC, or Apidos, our CLO management subsidiary, to CVC Capital Partners SICAV-FIS, S.A., a private equity firm, or CVC. In connection with the transaction, we received $25.0 million in cash before transaction costs and partnership interests in a joint venture, CVC Credit Partners, L.P., or CVC Credit Partners, that includes the Apidos portfolios as well as the portfolios contributed by CVC. Additionally, we retained a preferred equity interest in Apidos, which entitles us to receive 75% of the incentive management fees from the legacy Apidos portfolios that were previously managed by us and are now managed by CVC Credit Partners. We recorded a $54.5 million net gain on the sale during fiscal 2012. Through our new joint venture, we closed Apidos CLO IX ($409.8 million of par value) in July 2012, Apidos CLO X ($450 million of par value) in November 2012, Apidos CLO XI ($400 million of par value) in January 2013 and Apidos CLO XII ($523 million of par value) in April 2013. For fiscal 2013, we expect to continue to focus on managing our existing assets as well as to continue to expand our CLO business through our joint venture.
We currently account for our interests in LEAF Commercial Capital, Inc., or LEAF, as an equity method investment. In addition, we have recorded provisions for credit losses of $2.9 million and $7.4 million during the three and six months ended March 31, 2013 on our receivables due from three of our commercial finance investment funds based on reductions in their projected cash flows.
During the three months ended March 31, 2013, we sold our 10% interest in a real estate joint venture for $3.0 million. In conjunction with the sale, we recognized a gain of $1.6 million and reversed a $1.0 million provision for credit losses related to receivables from the joint venture that were previously deemed to be uncollectible. In addition, during the quarter ended March 31, 2013, we reversed a $1.5 million provision related to the collectability of receivables from other real estate investment entities due to improvements in the projected cash flows from the fund investments.
We recorded consolidated net income attributable to common shareholders of $744,000 during the three months ended March 31, 2013 and a net loss attributable to common shareholders of $703,000 for the six months ended March 31, 2013.




Assets Under Management
We increased our assets under management by $2.3 billion to $15.3 billion at March 31, 2013 from $13.0 billion at March 31, 2012. The following table sets forth information relating to our assets under management by operating segment (in millions, except percentages) (1):
 
March 31, 2013
 
Increase (Decrease)
 
2013
 
2012
 
Amount
 
Percentage
Financial fund management (2)
$
12,988

 
$
10,868

 
$
2,120

 
20%
Real estate
1,822

 
1,633

 
189

 
12%
Commercial finance
527

 
537

 
(10
)
 
(2)%
 
$
15,337

 
$
13,038

 
$
2,299

 
18%
 
(1)
We describe how we calculate assets under management in the notes to the third table of this section.
(2)
The increase is primarily due to the $2.0 billion addition of the CVC portfolio contributed in the April 2012 formation of CVC Credit Partners, in which we own a 33% interest, the issuance of three new Apidos CLOs (totaling $1.3 billion).  These increases were offset, in part, by reductions in the eligible collateral bases of our ABS ($231.1 million), corporate loan ($680.7 million) and trust preferred portfolios ($247.5 million) resulting from redemptions, defaults, paydowns, sales and calls.
Our assets under management are primarily managed through various investment entities including CDOs and CLOs, public and private limited partnerships, tenant-in-common, or TIC, property interest programs, two real estate investment trusts, or REITs, and other investment funds. All of our operating segments manage assets on behalf of Resource Capital Corp., or RSO. The following table sets forth the number of entities we manage by operating segment:
 
CDOs and CLOs
 
Limited Partnerships
 
TIC Programs
 
Other
Investment
Funds
As of March 31, 2013
 
 
 
 
 
 
 
Financial fund management
44
 
13
 
—
 
3
Real estate
2
 
9
 
6
 
5
Commercial finance
—
 
4
 
—
 
2
 
46
 
26
 
6
 
10
As of March 31, 2012
 
 
 
 
 
 
 
Financial fund management
38
 
13
 
—
 
1
Real estate
2
 
8
 
6
 
5
Commercial finance
—
 
4
 
—
 
2
 
40
 
25
 
6
 
8
As of March 31, 2013 and 2012, we managed assets in the following classes for the accounts of institutional and individual investors, RSO, and for our own account (in millions):
 
March 31, 2013
 
March 31, 2012
 
Institutional and Individual Investors
 
RSO
 
Company
 
Total
 
Total
Bank loans (1) 
$
5,569

 
$
2,593

 
$
—

 
$
8,162

 
$
5,570

Trust preferred securities (1) 
3,536

 
—

 
—

 
3,536

 
3,784

Asset-backed securities (1) 
1,160

 
—

 
—

 
1,160

 
1,391

Mortgage and other real
   estate-related loans (2)
2

 
990

 
—

 
992

 
908

Real properties (2) 
746

 
68

 
16

 
830

 
725

Commercial finance assets (3) 
527

 
—

 
—

 
527

 
537

Private equity and other assets (1) 
107

 
23

 
—

 
130

 
123

 
$
11,647

 
$
3,674

 
$
16

 
$
15,337

 
$
13,038

 
(1)
We value these assets at their amortized cost.


(2)
We value our managed real estate assets as the sum of:  (i) the amortized cost of our commercial real estate loans; and (ii) the book value of each of the following: (a) real estate and other assets held by our real estate investment entities, (b) our outstanding legacy loan portfolio, and (c) our interests in real estate.
(3)
We value our commercial finance assets as the sum of the book value of the financed equipment and leases and loans.

Employees
As of March 31, 2013, we had 608 full-time employees, an increase of 45 or (8%), from 563 employees at March 31, 2012, reflecting the increase by 51 employees at our property management subsidiary. The following table summarizes our employees by operating segment:
 
Total
 
Real Estate
 
Financial Fund
Management (1)
 
Corporate/
Other (2)
March 31, 2013
 
 
 
 
 
 
 
Investment professionals
56
 
42
 
11
 
3
Other
69
 
19
 
13
 
37
 
125
 
61
 
24
 
40
Property management
483
 
483
 
—
 
—
Total
608
 
544
 
24
 
40
 
 
 
 
 
 
 
 
March 31, 2012
 
 
 
 
 
 
 
Investment professionals
65
 
38
 
25
 
2
Other
66
 
19
 
12
 
35
 
131
 
57
 
37
 
37
Property management
432
 
432
 
—
 
—
Total
563
 
489
 
37
 
37
 
(1)
Decrease due to the April 2012 deconsolidation of Apidos as a result of the transaction with CVC.
(2)
As a result of the November 2011 deconsolidation of LEAF, we no longer have any commercial finance employees.
    
The revenues in each of our operating segments are generated by the fees we earn for structuring and managing the investment entities we sponsored on behalf of individual and institutional investors and RSO, and the income produced by the assets and investments we manage for our own account. The following table sets forth information about our revenue sources (in thousands): 
 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
 
2013
 
2012
 
2013
 
2012
Fund management revenues (1) 
$
7,968

 
$
9,397

 
$
15,196

 
$
17,846

Finance and rental revenues (2) 
2,005

 
1,986

 
4,507

 
8,085

RSO management fees
2,574

 
3,376

 
7,233

 
7,065

Gains on sale of investments (3) 
1,606

 
—

 
2,437

 
60

Other revenues (4) 
1,296

 
21

 
1,781

 
388

 
$
15,449

 
$
14,780

 
$
31,154

 
$
33,444

 
(1)
Includes fees from each of our real estate, financial fund management and commercial finance operations and our share of the income or loss from limited and general partnership interests we own in our real estate, financial fund management and commercial finance operations.
(2)
Includes rental income, revenues from certain real estate assets and interest income on bank loans from our financial fund management operations. For periods prior to November 2011, includes interest and rental income from our commercial finance operations.
(3)
Includes the resolution of loans we hold in our real estate segment.
(4)
Includes gains (losses) on trading securities. For periods prior to November 2011, primarily includes insurance fees, documentation fees and other charges earned by our commercial finance operations.
We provide a more detailed discussion of the revenues generated by each of our business segments under
“-Results of Operations: “:Real Estate”, “:Financial Fund Management”, and “:Commercial Finance.”



Results of Operations:  Real Estate
Through our real estate segment, we focus on four different areas:
•
the acquisition, ownership and management of portfolios of discounted real estate and real estate related debt, which we have acquired through three sponsored real estate investment entities as well as through joint ventures with institutional investors;
•
the management of sponsored real estate investment entities that principally invest in multifamily housing;
•
the management, principally for RSO, of general investments in commercial real estate debt, including first mortgage debt, whole loans, mortgage participations, B notes, mezzanine debt and related commercial real estate securities; and
•
to a significantly lesser extent, the management and resolution of a portfolio of real estate loans and property interests that we acquired at various times between 1991 and 1999, which we collectively refer to as our legacy portfolio.
    
The following table sets forth information related to real estate assets managed (1) (in millions):
 
March 31,
 
2013
 
2012
Assets under management (1):
 
 
 
Commercial real estate debt
$
938

 
$
801

Real estate investment funds and programs
582

 
577

RRE Opportunity REIT
150

 
66

Distressed portfolios
57

 
94

Properties managed for RSO
64

 
60

Institutional portfolios
15

 
15

Legacy portfolio
16

 
20

 
$
1,822

 
$
1,633

 
(1)
For information on how we calculate assets under management, see “Assets under Management”, above.     

We support our real estate investment funds by making long-term investments in them.  In addition, from time to time, we make bridge investments in the funds to facilitate acquisitions.  We record losses on these equity method investments primarily as a result of depreciation and amortization expense recorded by the property interests. Fee income can be highly variable and, for fiscal 2013, will depend upon the success of RRE Opportunity REIT and the timing of its acquisitions.


The following table sets forth information relating to the revenues recognized and costs and expenses incurred in our real estate operations (in thousands): 
 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Management fees:
 
 
 
 
 
 
 
Asset management fees
$
2,594

 
$
1,847

 
$
4,818

 
$
3,694

Resource Residential property management fees
2,233

 
1,570

 
4,258

 
3,207

RSO management fees
2,193

 
2,007

 
6,860

 
3,390

 
7,020

 
5,424

 
15,936

 
10,291

Other:
 

 
 

 
 

 
 

Rental property income and revenues of consolidated VIE (1)
949

 
946

 
2,378

 
2,259

Master lease revenues
1,056

 
1,040

 
2,129

 
2,059

Fee income from sponsorship of investment entities
689

 
2,271

 
1,573

 
3,072

Gains and fees on resolution of loans and other property interests
1,606

 
—

 
2,437

 
60

Equity in earnings of unconsolidated entities
20

 
35

 
41

 
641

 
$
11,340

 
$
9,716

 
$
24,494

 
$
18,382

Costs and expenses:
 

 
 

 
 

 
 

General and administrative expenses
$
4,693

 
$
3,760

 
$
8,861

 
$
7,507

Resource Residential property management expenses
2,355

 
1,748

 
4,444

 
3,346

Master lease expenses
1,579

 
1,042

 
2,652

 
2,058

Rental property expenses and expenses of consolidated VIE (1)
813

 
857

 
1,481

 
1,688

 
$
9,440

 
$
7,407

 
$
17,438

 
$
14,599

 
(1)
We generally consolidate a variable interest entity, or VIE, when we are deemed to be the primary beneficiary of the entity.
Revenues − Three and Six Months Ended March 31, 2013 as Compared to Three and Six Months Ended March 31, 2012
Revenues from our real estate operations increased $1.6 million and $6.1 million for the three and six months ended March 31, 2013, respectively.  We attribute the increases primarily to the following:
Management fees - increased by $1.6 million and $5.6 million, respectively, principally due to the following:
•
a $747,000 and $1.1 million increase, respectively, in asset management fees, reflecting a $626,000 and $1.2 million increase in broker-dealer manager fees earned in conjunction with an increase in the funds raised for RRE Opportunity REIT;
•
a $663,000 and $1.1 million increase, respectively, in property management fees earned by our property manager, Resource Residential, reflecting a 2,484 unit increase (15%) in multifamily units under management to 18,997 units at March 31, 2013 from 16,513 units at March 31, 2012; and
•
a $186,000 and $3.5 million increase, respectively, in RSO management fees. The base management fee increased by $668,000 and $1.3 million, respectively, due to the increase in the equity of RSO upon which this fee is based. We also earned incentive management fees of $2.6 million during the six months ended March 31, 2013 as compared to $482,000 for the same period last year. The incentive management fees are based on the adjusted operating earnings of RSO, which varies from period to period.
Other revenues
•
a $1.6 million and $2.4 million increase, respectively, in gains and fees on resolution of loans and investment entities. In January 2013, we sold our 10% interest in a real estate joint venture and recognized a gain of $1.6 million. In October 2012, we sold a commercial property located in Elkins, West Virginia, which was consolidated through a VIE, recognizing a gain of $831,000 (of which $793,000 was attributable to noncontrolling interests);
These increases were offset, in part, by:
•
a $1.6 million and $1.5 million decrease, respectively, in fee income in connection with the purchase and third-party financing of properties through our real estate investment entities, as follows:


•
during the three and six months ended March 31, 2013, we earned $689,000 and $1.6 million, respectively, in fees primarily from the following activities:
•
the acquisition of two and seven properties (valued at $18.6 million and $47.5 million, respectively); and
•
the sale of two and three properties (valued at $13.0 million and $29.1 million, respectively).
In comparison, during the three and six months ended March 31, 2012, we earned $2.3 million and $3.1 million, respectively, in fees primarily from the following activities:
•
the acquisition of two properties and two loans (valued at $38.2 million) during the three months ended March 31, 2012 and three properties and two loans (valued at $46.5 million) during the six months ended March 31, 2012; and
•
the sale of one property, including a promoted return of $1.2 million for the three months ended March 31, 2012 and the sale of two properties and two loans for the six months ended March 31, 2012.
•
a $15,000 and $600,000 decrease, respectively, in the equity in earnings of unconsolidated entities. During the three and six months ended March 31, 2013, we earned equity income of $20,000 and $41,000, respectively. The six months ended March 31, 2012 included a $750,000 gain in conjunction with the release of funds from escrow related to the fiscal 2011 sale of a Washington, DC office building held by one of our legacy portfolio investments.
Costs and Expenses − Three and Six Months Ended March 31, 2013 as Compared to Three and Six Months Ended March 31, 2012
Costs and expenses of our real estate operations increased $2.0 million (27%) and $2.8 million (19%), respectively. We attribute these changes primarily to the following:
•
a $933,000 and $1.4 million increase, respectively, in general and administrative expenses principally related to an $827,000 and $1.1 million increase, respectively, in wages and benefits. During the three months ended March 31, 2013, we allocated an additional $513,000 of corporate wages and benefits to our real estate segment in conjunction with the increase in its operating activities. In addition, these increases in wages and benefits reflect the additional staffing required to manage the increased properties under management as well as the additional personnel hired at our broker-dealer, Resource Securities, to enhance our fundraising capabilities; and
•
a $607,000 and $1.1 million increase, respectively, in Resource Residential expenses primarily due to increased wages and benefits, principally in conjunction with the additional personnel needed to operate and manage the increased number of properties under management.
Results of Operations:  Financial Fund Management
General. We conduct our financial fund management operations primarily through six separate operating entities:
•
CVC Credit Partners, a joint venture between us and CVC, finances, structures and manages investments in bank loans, high yield bonds and equity investments through CLO issuers, managed accounts and a credit opportunities fund. Prior to April 17, 2012, we conducted these operations through our Apidos subsidiary;
•
Trapeza Capital Management, LLC, or TCM, a joint venture between us and an unrelated third party, manages investments in trust preferred securities and senior debt securities of banks, bank holding companies, insurance companies and other financial companies through CDO issuers and related partnerships. TCM, together with the Trapeza CDO issuers and Trapeza partnerships, are collectively referred to as Trapeza;
•
Resource Financial Institutions Group, Inc., or RFIG, serves as the general partner for seven company-sponsored affiliated partnerships which invest in financial institutions;
•
Ischus Capital Management, LLC, or Ischus, finances, structures and manages investments in ABS including residential mortgage-backed securities, or RMBS, and commercial mortgage-backed securities, or CMBS;
•
Resource Capital Markets, Inc., or Resource Capital Markets, through our registered broker-dealer subsidiary, Resource Securities, Inc., or Resource Securities, acts as an agent in the primary and secondary markets for structured finance securities and manages accounts for institutional investors; and
•
Resource Capital Manager, Inc., or RCM, an indirect wholly-owned subsidiary, provides investment management and administrative services to RSO under a management agreement between us, RCM and RSO.
    
    


The following table sets forth information relating to assets managed by our financial fund management operating entities on behalf of institutional and individual investors and RSO (in millions) (1):
 
Institutional and
Individual Investors
 
RSO
 
Total by Type
March 31, 2013
 
 
 
 
 
CVC Credit Partners (2) 
$
5,569

 
$
2,593

 
$
8,162

Trapeza
3,536

 
—

 
3,536

Ischus
1,160

 
—

 
1,160

Other company-sponsored partnerships
107

 
23

 
130

 
$
10,372

 
$
2,616

 
$
12,988

March 31, 2012
 

 
 

 
 

Apidos (2)
$
2,654

 
$
2,916

 
$
5,570

Trapeza
3,784

 
—

 
3,784

Ischus
1,391

 
—

 
1,391

Other company-sponsored partnerships
84

 
39

 
123

 
$
7,913

 
$
2,955

 
$
10,868

 
(1)
For information on how we calculate assets under management, see "Assets Under Management”, above.
(2)
In April 2012, we sold 100% of Apidos to CVC and retained a 33% interest in CVC Credit Partners, which manages the former Apidos portfolio as well as the portfolio contributed by CVC.

In our financial fund management operating segment, we earn monthly fees on assets managed on behalf of institutional and individual investors as follows:
•
Collateral management fees − we receive fees for managing the assets held by CLO and CDO issuers we have sponsored, including subordinate and incentive fees. These fees vary by issuer, with our annual fees ranging between 0.1% and 0.25% of the aggregate principal balance of the eligible collateral owned by the issuers. The indentures to the notes require that certain overcollateralization test ratios, or O/C ratios, be maintained. O/C ratios measure the ratio of assets (collateral) to liabilities (notes) of a given issuer. Losses incurred on collateral due to payment defaults, payment deferrals or rating agency downgrades reduce the O/C ratios. If specified O/C ratios are not met by an issuer, subordinate or incentive management fees, which are discussed in the following sections, are deferred and interest collections from collateral are applied to outstanding principal balances on the notes, typically in order of seniority.
•
Administration fees − we receive fees for managing the assets held by our company-sponsored partnerships and, through April 2012, our credit opportunities fund (which is now being managed by CVC Credit Partners). These fees vary by limited partnership or fund, with our annual fee ranging between 0.75% and 2.00% of the partnership or fund capital balance.
Based on the terms of our general partner interests, two of the Trapeza partnerships we manage as general partner include a clawback provision.
We discuss the basis for our fees and revenues for each area in more detail in the following sections.
Our financial fund management operations historically have depended upon our ability to sponsor and manage CLO and CDO issuers. During the past several years, the market for CDOs has been non-existent and extremely limited for CLOs. In fiscal 2012, the market for CLO issuances improved dramatically. As a result, in October 2011, we were able to sponsor Apidos CLO VIII, the first such deal we closed since fiscal 2007. In July 2012, CVC Credit Partners closed its first CLO, Apidos CLO IX, and in November 2012 and January and April 2013, closed Apidos CLO X, Apidos CLO XI and Apidos CLO XII, respectively.
CVC Credit Partners
Through CVC Credit Partners, we and our joint venture partner have sponsored, structured and/or currently manage 22 CLO issuers for institutional and individual investors and RSO. These joint venture CLO issuers, accounts and funds hold approximately $8.2 billion in U.S. and European bank loans and corporate bonds at March 31, 2013, of which $2.6 billion are managed on behalf of RSO.


Under our former Apidos business, we derived revenues through base and subordinate management fees. Base management fees varied by CLO issuer (ranged between 0.01% and 0.15% of the aggregate principal balance of eligible collateral held by the CLO issuers). Subordinate management fees, which also varied by CLO issuer (ranged between 0.04% and 0.40% of the aggregate principal balance of eligible collateral held by the CLO issuers), were subordinated to debt service payments on the CLOs. In connection with the sale of Apidos, we retained the right to 75% of the incentive management fees earned by the legacy Apidos CLOs.  In January 2013, we received $409,000 for our share of the incentive fee payments from three of the legacy Apidos CLOs.
As a result of the sale and resulting deconsolidation of Apidos, we no longer reflect the revenues and expenses of the Apidos business in our consolidated results, and instead record our 33% equity interest in the operations of CVC Credit Partners.
Trapeza
In our Trapeza operations, we sponsored, structured and currently co-manage 13 CDO issuers holding approximately $3.5 billion in trust preferred securities of banks, bank holding companies, insurance companies and other financial companies.
We own a 50% interest in an entity that manages 11 Trapeza CDO issuers and a 33.33% interest in another entity that manages two Trapeza CDO issuers. We also own a 50% interest in the general partners of the limited partnerships that own the equity interests of five Trapeza CDO issuers. Additionally, as part of our sponsorship and management interest, we hold limited partnership interests in each of these limited partnerships. On November 1, 2009 and January 28, 2010, those general partners repurchased substantially all of the remaining limited partnership interests in two of the Trapeza entities.
We derive revenues from our Trapeza operations through base management fees. Base management fees vary by CDO issuer, but range from between 0.10% and 0.25% of the aggregate principal balance of the eligible collateral held by the CDO issuers. These fees are shared with our co-sponsors.
Ischus
We sponsored, structured and/or currently manage nine CDO issuers for institutional and individual investors, which hold approximately $1.2 billion in primarily real estate ABS including RMBS, CMBS and credit default swaps.
We derive revenues from our Ischus operations through base management fees. Base management fees vary by CDO issuer, ranging from between 0.10% and 0.20% of the aggregate principal balance of eligible collateral held by the CDO issuer.
Company-Sponsored Partnerships
We sponsored, structured and, through RFIG, currently manage seven affiliated partnerships for individual and institutional investors, which hold approximately $65.7 million of investments in financial institutions. We derive revenues from these operations through annual management fees ranging from 0.75% to 2.0% of the equity invested in these partnerships. As part of our sponsorship, management and general partnership interests, we hold limited partnership interests in these partnerships. We may receive a carried interest of up to 20% upon meeting specific investor return rates.
Through our Resource Capital Markets group, we engage in structured finance security trading, both as an agent through Resource Securities, and for our own account. We earn introductory agent fees which are negotiated on a deal-by-deal basis. In our own trading portfolio, we buy and sell structured finance securities and record both unrealized and realized gains and losses which are reflected in Financial Fund Management revenues.
    


The following table sets forth certain information relating to the revenues recognized and costs and expenses incurred in our financial fund management operations (in thousands):
 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Fund management fees
$
733

 
$
3,688

 
$
1,471

 
$
7,515

Fund management fees - incentive
409

 
—

 
409

 
—

RSO management fees - trading portfolio
226

 
840

 
218

 
2,695

RSO management fees
155

 
529

 
155

 
980

Introductory agent fees
331

 
569

 
771

 
720

Equity in earnings of unconsolidated CDO issuers
227

 
215

 
447

 
409

Equity in earnings of CVC Credit Partners
582

 
—

 
1,447

 
—

Gains, net, on trading securities
1,276

 
—

 
1,759

 
—

Other revenues
20

 
21

 
22

 
21

 
3,959

 
5,862

 
6,699

 
12,340

Total limited and general partner interests
328

 
442

 
263

 
543

 
$
4,287

 
$
6,304

 
$
6,962

 
$
12,883

Costs and expenses:
 

 
 

 
 

 
 
General and administrative expenses
$
2,528

 
$
4,379

 
$
3,545

 
$
10,183

Fees and/or reimbursements that we receive vary by transaction and, accordingly, there may be significant variations in the revenues we recognize from our financial fund management operations from period to period.
Revenues − Three Months Ended March 31, 2013 as Compared to Three Months Ended March 31, 2012
Revenues of our financial fund management operations decreased $2.0 million (32%) to $4.3 million for the three months ended March 31, 2013 from $6.3 million for the three months ended March 31, 2012. We attribute the decrease primarily to the following:
•
a $3.0 million decrease in fund management fees, principally CLO collateral management and partnership management fees, in connection with the sale of Apidos;
•
a $374,000 decrease in RSO management fees, reflecting the $529,000 decrease in base and incentive management fees due to the sale of Apidos, offset in part by a $155,000 increase in oversight fees earned for the management of a new portfolio of life insurance policies on behalf of RSO;
•
a $614,000 decrease in incentive management fees earned from managing a trading portfolio on behalf of RSO which varies by quarter based on transactional activity;
•
a $238,000 decrease in introductory agent fees as a result of fees earned in connection with 11 structured security transactions with an average fee of $30,000 for the three months ended March 31, 2013 as compared to 28 structured security transactions with an average fee of $20,000 for the prior year period; and
•
a $114,000 decrease primarily from our share of realized and unrealized fair value adjustments recorded relative to our limited and general partner interests held in unconsolidated company-sponsored partnerships, the value of which depends on market conditions and may vary significantly from period to period.
These decreases were partially offset by the following:
•
a $1.3 million increase in realized and unrealized gains, and interest recorded on trading securities purchased since April 2012;
•
a $582,000 increase in earnings in unconsolidated entities reflecting the results of our joint venture partnership with CVC Credit Partners which commenced in April 2012; and
•
a $409,000 increase in fund management incentive fees reflecting payments received in connection with retaining 75% of the incentive management fees earned by the legacy Apidos CLOs.



Costs and Expenses − Three Months Ended March 31, 2013 as Compared to Three Months Ended March 31, 2012
Costs and expenses of our financial fund management operations decreased $1.9 million (42%) for the three months ended March 31, 2013. We attribute the decrease primarily to the following:
•
a $2.1 million decrease in general and administrative expenses principally related to a $1.9 million decrease in wages and benefits due to the reduced number of employees in connection with the sale of Apidos; offset in part by
•
a $239,000 increase in professional fees related to a sharing arrangement with certain former employees in connection with the incentive fees earned on the legacy Apidos CLOs.
Revenues − Six Months Ended March 31, 2013 as Compared to Six Months Ended March 31, 2012
Revenues of our financial fund management operations decreased $5.9 million (46%) to $7.0 million for the six months ended March 31, 2013 from $12.9 million for the six months ended March 31, 2012. We attribute the decrease primarily to the following:
•
a $6.0 million decrease in fund management fees, principally due to the decrease in CLO collateral management and partnership management fees in connection with the sale of Apidos;
•
a $825,000 decrease in RSO management fees, reflecting the $980,000 decrease in base and incentive management fees due to the sale of Apidos offset, in part, by the $155,000 increase in fees related to a new oversight fee charged to RSO relating to our management of a portfolio of life insurance policies on its behalf;
•
a $2.5 million decrease in incentive management fees earned from managing a trading portfolio on behalf of RSO; and
•
a $280,000 decrease in our share of realized and unrealized fair value adjustments recorded relative to our limited and general partner interests held in unconsolidated company-sponsored partnerships, the value of which depends on market conditions and may vary significantly from period to period.
These decreases were partially offset by the following:
•
a $1.8 million increase in realized and unrealized gains, and interest recorded on trading securities purchased since April 2012;
•
a $1.4 million increase in earnings in unconsolidated entities reflecting the results of the CVC joint venture;
•
a $409,000 increase in fund management incentive fees reflecting payments received in connection with retaining 75% of the incentive management fees earned by the legacy Apidos CLOs;
•
a $51,000 increase in introductory agent fees as a result of fees earned in connection with 19 structured security transactions with an average fee of $31,000 for the six months ended March 31, 2013 as compared to 35 structured security transactions with an average fee of $21,000 for the prior year period; and
•
a $38,000 net increase in earnings from six unconsolidated CLO issuers invested in bank loans we previously sponsored and managed, primarily due to the three CLO equity purchases since July 2012.
Costs and Expenses − Six Months Ended March 31, 2013 as Compared to Six Months Ended March 31, 2012
Costs and expenses of our financial fund management operations decreased $6.6 million (65%) for the six months ended March 31, 2013. We attribute the decrease primarily to the following:
•
a $6.2 million decrease in general and administrative expenses principally related to a $2.9 million decrease in wages and benefits due to the reduced number of employees in connection with the sale of Apidos and a $3.4 million decrease in incentive related pay in connection with the portfolio management activities conducted on behalf of RSO; and
•
a $433,000 decrease in other general and administrative expenses primarily due to an increase in costs allocated to RSO under our management agreement.



Results of Operations:  Commercial Finance
In January 2011, we contributed the leasing origination and servicing platform of LEAF Financial to LEAF to facilitate outside investment in our commercial finance business. RSO also contributed assets and cash to LEAF, and Guggenheim Securities LLC, or Guggenheim, provided a credit facility for use in LEAF's originations. LEAF Financial retained the management of four equipment leasing partnerships, for which LEAF is the sub-servicer. As a result of the investment in LEAF by a third-party private investment firm in November 2011, we determined that we no longer controlled LEAF and, accordingly, it was deconsolidated from our financial statements. Subsequently, we have recorded our retained interest in LEAF on the equity method of accounting.
The commercial finance assets we manage through LEAF decreased by $10.0 million to $527.0 million as compared to $537.0 million at March 31, 2012. This decrease reflects a $154.0 million reduction in assets we managed for our four investment entities due to the natural runoff of the lease portfolios, which was offset by a $144.0 million increase in the LEAF portfolio. As of March 31, 2013, LEAF managed approximately 55,000 leases and loans for itself and our investment entities, with an average original finance value of $24,000 and an average term of 57 months, as compared to approximately 58,000 leases and loans with an average original finance value of $26,000 and an average term of 58 months as of March 31, 2012.
The following table sets forth information related to commercial finance assets managed by us and our unconsolidated joint venture (1) (in millions):
 
March 31,
 
2013
 
2012
LEAF
$
413

 
$
269

Commercial finance investment entities
114

 
268

 
$
527

 
$
537

 
(1)
For information on how we calculate assets under management, see - “Assets under Management”, above.
During fiscal 2012, our share of LEAF's losses reduced our investment in that entity to zero, such that we will not incur any additional equity losses in LEAF. However, we continue to record our share of any charges that may be recorded in LEAF's accumulated other comprehensive income relating to its hedging activities.
We continue to consolidate the operating results of LEAF Financial. Commencing December 1, 2010, we agreed to waive all future management fees from our commercial finance investment partnerships due to their reduced equity distributions as a result of the impact of the recession on their respective cash flows. Accordingly, we waived $618,000 and $1.4 million of fund management fees from these entities during the three and six months ended March 31, 2013, respectively, and $1.2 million and $2.7 million during the three and six months ended March 31, 2012, respectively.
The following table sets forth certain information relating to the revenues recognized and costs and expenses incurred in our commercial finance operations (in thousands):    
 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
 
2013
 
2012
 
2013
 
2012
Revenues:(1)
 
 
 
 
 
 
 
 Equity in losses of investment entities
$
(173
)
 
$
(87
)
 
$
(292
)
 
$
(237
)
 Equity in losses of LEAF
(5
)
 
(1,153
)
 
(10
)
 
(1,718
)
 
(178
)
 
(1,240
)
 
(302
)
 
(1,955
)
Other:
 
 
 
 
 
 
 
 Finance revenues
—

 
—

 
—

 
3,767

 Other fees
—

 
—

 
—

 
367

 
$
(178
)
 
$
(1,240
)
 
$
(302
)
 
$
2,179

Costs and expenses:
 

 
 

 
 

 
 
General and administrative expenses - wages and benefit costs
$
33

 
$
49

 
$
90

 
$
1,924

General and administrative expenses - other
12

 
181

 
(94
)
 
921

Less: deferred initial direct costs and fees
—

 
—

 
—

 
(652
)
 
$
45

 
$
230

 
$
(4
)
 
$
2,193





Results of Operations:  Other Costs and Expenses
General and Administrative Expenses
Three and Six Months Ended March 31, 2013 as Compared to Three and Six Months Ended March 31, 2012. General and administrative costs were $2.2 million and $4.4 million for the three and six months ended March 31, 2013, respectively, a decrease of $310,000 (13%) and $1.0 million (18%) as compared to $2.5 million and $5.4 million for the three and six months ended March 31, 2012, respectively. These decreases reflect the increased allocation of corporate general and administrative costs to our operating segments, principally real estate, in conjunction with the increase in the respective operating activities at those entities. During the three and six months ended March 31, 2013, we allocated $513,000 of additional wages to our real estate segment. In addition, there was a $179,000 reduction in amortization expense related to stock-based compensation for the six months ended March 31, 2013 as compared to the prior year period.
Restructuring Expenses
We recorded a $365,000 charge for restructuring during the three months ended March 31, 2012 consisting of severance and benefits for terminated employees. The decrease in staffing levels reflects our decreased overhead requirements as a result of the sale of Apidos and the recapitalization of LEAF. 
Provision for Credit Losses
The following table sets forth our provision for credit losses as reported by segment (in thousands):
 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
 
2013
 
2012
 
2013
 
2012
Commercial finance:
 
 
 
 
 
 
 
Receivables from managed entities
$
2,863

 
$
2,865

 
$
7,371

 
$
4,860

Leases, loans and future payment card receivables
(3
)
 
(6
)
 
(6
)
 
145

Real estate:
 

 
 

 
 

 
 

Receivables from managed entities
(2,533
)
 
98

 
(2,378
)
 
188

Rent receivables
11

 
5

 
46

 
19

Financial fund management - receivables from
  managed entities
—

 
—

 
457

 
—

 
$
338

 
$
2,962

 
$
5,490

 
$
5,212

We have estimated, based on projected cash flows, that three of the commercial finance funds that we sponsored and managed will not have sufficient funds to pay a portion of their accrued management fees and, accordingly, we recorded provisions of $2.9 million and $7.4 million for the three and six months ended March 31, 2013, respectively, and $2.9 million and $4.9 million for the three and six months ended March 31, 2012, respectively. As a result of the sale of our interest and full repayment of accrued management fees in a real estate joint venture, we reversed a $1.0 million provision previously recorded. Additionally, due to increases in the projected cash flows of the real estate investment partnerships, we reversed an additional $1.5 million provision for credit losses during the three months ended March 31, 2013. These provision decreases were offset, in part, by the $457,000 reserve we recorded during the six months ended March 31, 2013 against a receivable relating to the sale of Apidos.
Depreciation and Amortization
Depreciation expense decreased by $119,000 and $1.7 million for the three and six months ended March 31, 2013, respectively, as compared to the prior year periods. The decline for the six months ended March 31, 2013 primarily reflects the November 2011 deconsolidation of LEAF. The following table reflects the detail of our depreciation expense (in thousands):
 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
 
2013
 
2012
 
2013
 
2012
Real estate property investments
$
180

 
$
234

 
$
391

 
$
464

Other operating segments depreciation on fixed assets
236

 
301

 
517

 
576

LEAF
—

 
—

 
—

 
1,556

Total depreciation expense
$
416

 
$
535

 
$
908

 
$
2,596



Net Other-than-Temporary Impairment Charges on Investment Securities
During the three and six months ended March 31, 2013 and 2012, we recorded $214,000 and $74,000, respectively, of other-than-temporary impairment charges on CLO investments which primarily invested in bank loans.
Interest Expense
Interest expense includes the non-cash amortization of debt issuance costs as well as discounts related to the following: (a) the value of the warrants issued to the original holders of our Senior Notes, (b) warrants that LEAF issued in connection with its credit facility, and (c) LEAF's securitized borrowings and the corresponding issuance of equipment-backed notes. We recorded interest expense for LEAF for the period prior to its deconsolidation in November 2011. The following table reflects interest expense as reported by segment (in thousands):
 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
 
2013
 
2012
 
2013
 
2012
Corporate
$
296

 
$
396

 
$
606

 
$
1,464

Real estate
197

 
213

 
409

 
428

Commercial finance
1

 
36

 
1

 
1,727

 
$
494

 
$
645

 
$
1,016

 
$
3,619

Facility utilization and issuance of Senior Notes (in millions) and corresponding interest rates on borrowings outstanding were as follows: 
 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
 
2013
 
2012
 
2013
 
2012
Corporate facilities
 
 
 
 
 
 
 
  Senior Notes: (1)
 
 
 
 
 
 
 
Average borrowings
$10.0
 
$10.0
 
$10.0
 
$12.8
Average interest rates
9.0%
 
9.0%
 
9.0%
 
10.4%
 
 
 
 
 
 
 
 
  Secured credit facilities (and TD Bank term note in fiscal 2012):
 
 
 
 
 
 
 
Average borrowings
$0.6
 
$5.3
 
$0.3
 
$5.8
Average interest rates
3.2%
 
6.0%
 
3.2%
 
6.0%
 
 
 
 
 
 
 
 
Commercial finance (transferred and/or terminated facilities) (2)
 
 
 
 
 
 
 
  Secured credit facilities:
 
 
 
 
 
 
 
Average borrowings
$—
 
$—
 
$—
 
$68.8
Average interest rates
—%
 
—%
 
—%
 
4.2%
 
 
 
 
 
 
 
 
  Term securitizations:
 
 
 
 
 
 
 
Average borrowings
$—
 
$—
 
$—
 
$112.8
Average interest rates
—%
 
—%
 
—%
 
4.2%
 
(1)
In November 2011, we refinanced the Senior Notes through a partial redemption and modification, which reduced the principal balance outstanding from $18.8 million to $10.0 million and reduced the interest rate from 12% to 9%.
(2)
The amounts presented for commercial finance for fiscal 2012 reflect activity during the period from October 1 to November 16, 2011. Subsequently, we deconsolidated LEAF, including these facilities, from our consolidated financial statements.

As a result of the reduction in both corporate borrowings and the average interest rate on those borrowings, interest expense for the three and six months ended March 31, 2013 decreased by $100,000 and $858,000, respectively, as compared to the same periods in the prior year. Additionally, for the six months ended March 31, 2012, interest expense decreased by $1.7 million due to the November 2011 deconsolidation of LEAF.


Gain on the Deconsolidation and Sale of Subsidiaries
Gain on Deconsolidation of LEAF. In November 2011, we obtained an additional investment in LEAF by a third-party private investment firm. Accordingly, we determined that we no longer controlled LEAF and, effective with that investment, we deconsolidated it for financial reporting purposes. Our equity interest in LEAF is 14.9% on a fully diluted basis. We recorded a $7.0 million gain to bring the value of our negative investment in LEAF to zero. In addition, a third-party firm valued our investment in LEAF as of November 2011 at $1.7 million. Accordingly, during the six months ended March 31, 2012, we recorded a total gain of $8.7 million in conjunction with the deconsolidation of LEAF.
Loss on Extinguishment of Debt
In September and October 2009, we issued $18.8 million of Senior Notes along with detachable 5-year warrants to purchase common stock. The proceeds from the Senior Notes were allocated to the notes and the warrants based on their relative fair values. The fair value of the warrants was recorded as a discount to the notes and was amortized over the 3-year term of the Senior Notes using the effective interest method. In November 2011, we refinanced the Senior Notes through a partial redemption and modification and, as a result, expensed the remaining $2.2 million unamortized discount related to the warrants.
Other Income
The following table details our other income, net of other expenses (in thousands):
 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
 
2013
 
2012
 
2013
 
2012
RSO dividend income
$
556

 
$
505

 
$
1,090

 
$
1,136

Interest income (1)
265

 
130

 
427

 
254

Amortization of unrecognized loss - retirement plan (2)
(100
)
 
(83
)
 
(200
)
 
(166
)
Other expense, net
19

 
73

 
11

 
(40
)
Other income, net
$
740

 
$
625

 
$
1,328

 
$
1,184

 
(1)
Includes accretion of discount on receivables from real estate managed entities of $242,000 and $382,000 for the three and six months ended March 31, 2013, respectively, and $112,000 and $212,000 for the three and six months ended March 31, 2012, respectively.
(2)
Includes amortization of losses in the securities held in the retirement plan for our former Chief Executive Officer.
Net Loss (Income) Attributable to Noncontrolling Interests
We record third-party interests in our earnings as amounts allocable to noncontrolling interests.  Subsequent to the deconsolidation of LEAF in November 2011, we no longer record commercial finance noncontrolling interests.  The following table sets forth the net loss (income) attributable to noncontrolling interests (in thousands):
 
Three Months Ended
 
Six Months Ended
 
March 31,
 
March 31,
 
2013
 
2012
 
2013
 
2012
Real estate:
 
 
 
 
 
 
 
  Related-party interest in our hotel property(1) 
$
43

 
$
39

 
$
(28
)
 
$
14

  Outside interests in a commercial property, net of tax of
      $278 and $0(2)
—

 
—

 
(516
)
 
—

Commercial finance:
 
 
 
 
 
 
 
  RSO investment in LEAF preferred stock(3) 
—

 
—

 
—

 
(571
)
  Stock-based compensation(4)
—

 
—

 
—

 
218

 
$
43

 
$
39

 
$
(544
)
 
$
(339
)
 
(1)
A related party holds a 19.99% interest in our investment in a hotel property in Savannah, Georgia.
(2)
A third party's interest in a commercial real estate property in Elkins, West Virginia that we previously had consolidated as a VIE. The property underlying the loan was sold and our investment was resolved during the three months ended December 31, 2012.
(3)
In the January 2011 formation of LEAF, RSO received 3,743 shares of LEAF Series A preferred stock and warrants to purchase 4,800 shares of LEAF common stock at $0.01 per share. The warrants were recorded as a discount to the preferred stock and are being amortized over the five-year term of the warrants. As a result of the deconsolidation of LEAF, this noncontrolling interest was eliminated.


(4)
Senior executives of LEAF held a 13.9% interest in LEAF Financial as of December 31, 2010. In January 2011, these shares were exchanged for a 21.98% interest in LEAF (10% on a fully diluted basis). As a result of the deconsolidation of LEAF, we no longer record this noncontrolling interest.
Income Taxes
Three and Six Months Ended March 31, 2013 as Compared to Three and Six Months Ended March 31, 2012.  Our effective income tax rate (income taxes as a percentage of income from continuing operations, before taxes) was a benefit of 26% and 72% for the three and six months ended March 31, 2013, respectively, as compared to a benefit of 36% and 40% for the three and six months ended March 31, 2012, respectively.  Our effective income tax rate without discrete tax items would have been a 14% tax expense and an 82% tax benefit for the three and six months ended March 31, 2013, respectively.  We project our effective tax rate to be a benefit between 96% and 140% for fiscal 2013. The increase in the projected tax rate reflects the greater impact of expected tax benefits, specifically the dividend received deduction on taxable earnings from CVC Credit Partners relative to our projected pre-tax earnings. This rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings and the level of our tax credits. We take certain of these and other factors, including our history of pretax earnings, into account in assessing our ability to realize our net deferred tax assets.
We are subject to examination by the U.S. Internal Revenue Service, or IRS, and other taxing authorities in certain states in which we have significant business operations. We are currently undergoing a New York State examination for fiscal 2007 - 2009.  We are no longer subject to U.S. federal income tax examinations for fiscal years before 2009 and are no longer subject to state and local income tax examinations by tax authorities for fiscal years before 2006.
Liquidity and Capital Resources
As an asset management company, our liquidity needs consist principally of capital needed to make investments and to pay our operating expenses (principally wages and benefits and interest expense). Our ability to meet our liquidity needs will be subject to our ability to generate cash from operations, and, with respect to our investments, our ability to raise investor funds.
At March 31, 2013, our liquidity consisted of four primary sources:
•
cash on hand of $15.4 million;
•
$10.5 million of availability under our two corporate credit facilities;
•
potential disposition of non-core assets; and
•
cash generated from operations.
Disposition of Non-core Assets. Our legacy portfolio at March 31, 2013 consisted of five property interests. To the extent we are able to dispose of these assets, we will obtain additional liquidity. The amount of additional liquidity we obtain will vary significantly depending upon the asset being sold and then-current economic conditions. We cannot assure you that any dispositions will occur or as to the timing or amounts we may realize from any such dispositions.
Refinancing Our Debt. We amended our Republic and TD Bank facilities in October and November 2012, respectively, to extend the maturities of these facilities to December 2014. In December 2012, we amended our Senior Notes to extend their maturity to March 2015.
As of March 31, 2013, our total borrowings outstanding of $22.3 million included $10.0 million of Senior Notes, $10.4 million of mortgage debt (secured by the underlying hotel property) and $1.9 million of other debt.
Capital Requirements
Our capital needs consist principally of funds to make investments in the investment vehicles we sponsor or for our own account and to provide bridge financing or other temporary financial support to facilitate asset acquisitions by our sponsored investment vehicles. Accordingly, the amount of capital we require will depend to a significant extent upon our level of activity in making investments for our own account or in sponsoring investment vehicles, all of which is largely within our discretion.
Dividends
We used cash reserves to fund our dividends during periods in which our cash flows from operations were insufficient.
Our Senior Notes limit the amount of future cash dividends to $0.03 per share unless our basic earnings per common share from continuing operations from the preceding fiscal quarter exceeds $0.25 per share. Subject to the limitations imposed by our Senior Notes, the determination of the amount of future cash dividends, if any, is at the discretion of our board of directors and will depend on the various factors affecting our financial condition and other matters the board of directors deems relevant.



Contractual Obligations and Other Commercial Commitments
The following tables summarize our contractual obligations and other commercial commitments at March 31, 2013 (in thousands):
 
 
 
Payments Due By Period
 
Total
 
Less than
1 Year
 
1 – 3 
Years
 
4 – 5
Years
 
After
5 Years
Contractual obligations:
 
 
 
 
 
 
 
 
 
Non-recourse to the Company:
 
 
 
 
 
 
 
 
 
Mortgage - hotel property (1)
$
10,425

 
$
189

 
$
414

 
$
473

 
$
9,349

 
 
 
 
 
 
 
 
 
 
Recourse to the Company:
 
 
 
 
 
 
 
 
 
Other debt (1) 
11,693

 
123

 
11,570

 
—

 
—

Capital lease obligations (1) 
198

 
198

 
—

 
—

 
—

 
11,891

 
321

 
11,570

 
—

 
—

 
 
 
 
 
 
 
 
 
 
Operating lease obligations
16,460

 
2,000

 
3,963

 
3,947

 
6,550

Other long-term liabilities
8,385

 
978

 
1,609

 
1,486

 
4,312

Total contractual obligations
$
47,161

 
$
3,488

 
$
17,556

 
$
5,906

 
$
20,211

 
(1)
Not included in the table above are estimated interest payments calculated at rates in effect at March 31, 2013; less than 1 year: $1.7 million; 1-3 years:  $2.3 million; 4-5 years:  $1.2 million; and after 5 years: $2.0 million.
 
 
 
Amount of Commitment Expiration Per Period
 
Total
 
Less than
1 Year
 
1 – 3
Years
 
4 – 5
Years
 
After
5 Years
Other commercial commitments:
 
 
 
 
 
 
 
 
 
Guarantees
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Real estate commitments
512

 
512

 
—

 
—

 
—

Standby letters of credit
803

 
803

 
—

 
—

 
—

Total commercial commitments
$
1,315

 
$
1,315

 
$
—

 
$
—

 
$
—

LEAF Valuation Commitment. In conjunction with the third-party equity investment in LEAF, we along with RSO have jointly undertaken a contingent obligation with respect to the equity value of the entity that holds the portfolio of equipment, equipment leases and notes that RSO contributed to LEAF. To the extent that equity in the entity falls below $18.7 million (the balance as of the contribution date) as of the final testing date within 90 days of December 31, 2013, we and RSO have agreed to be jointly and severally obligated to contribute cash to LEAF to cover the shortfall. As of March 31, 2013, the value of the equity of the entity was in excess of the commitment and, therefore, we were not required to record a liability with respect to this obligation.
Limited Loan Guarantee. We and two of our commercial finance fund partnerships, Lease Equity Appreciation Fund I, L.P., or LEAF I, and Lease Equity Appreciation Fund II, L.P., or LEAF II, have provided a limited guarantee to a lender to the partnerships in exchange for a waiver of any existing defaulted loan covenants and certain future financial covenants. The loans mature at the earlier of (a) the maturity date (March 20, 2014 for the LEAF I loan and December 21, 2013 for the LEAF II loan), or (b) the date on which an event of default under the loan agreement occurs. The maximum guarantee provided by us is up to $7.3 million ($2.3 million for LEAF I and $5.0 million for LEAF II). If we were required to make any such payments under the guarantee in the future, we would have the option to either step in as the lender or otherwise make a capital contribution to the LEAF partnerships for the amount of the required guarantee payment. Under certain circumstances, the lender will also discount its loans by approximately $250,000 for LEAF I and $347,500 for LEAF II. Management has determined that, based on projected cash flows from the underlying lease and loan portfolios collateralizing the loans, there should be sufficient funds to repay the LEAF partnerships' outstanding loan balances and, accordingly, we have not recorded any liability with respect to this guarantee.
    


Broker-Dealer Capital Requirement. Resource Securities, our wholly-owned subsidiary, is a registered broker-dealer and serves as a dealer-manager for the sale of securities of direct participation investment programs, both public and private, sponsored by our subsidiaries who also serve as general partners and/or managers of these programs. Additionally, Resource Securities serves as an introducing agent for transactions involving sales of securities of financial services companies, REITs and insurance companies and for us and RSO.  As a broker-dealer, Resource Securities is required to maintain minimum net capital, as defined in regulations under the Securities Exchange Act of 1934, as amended, which was $125,000 and $100,000 as of March 31, 2013 and September 30, 2012, respectively.  As of March 31, 2013 and September 30, 2012, Resource Securities net capital was $623,000 and $447,000, respectively, which exceeded the minimum requirements by $498,000 and $347,000, respectively.
Clawback Liability. Two financial fund management investment entities that have incentive distributions, also known as carried interests, are structured so that there is a “clawback” of previously paid incentive distributions to the extent that such distributions exceed the cumulative net profits of the entities, as defined in the respective partnership agreements.  On November 1, 2009 and January 28, 2010, we, along with the co-manager of the general partner of those investment entities, repurchased substantially all the remaining limited partnership interests in these two partnerships, significantly reducing our potential clawback liability. The clawback liability we recorded was $1.2 million at March 31, 2013 and September 30, 2012.
Legal proceedings. In September 2011, First Community Bank, or First Community, filed a complaint against First Tennessee Bank and approximately thirty other defendants consisting of investment banks, rating agencies, collateral managers, including Trapeza Capital Management, LLC, or TCM, and issuers of CDOs, including Trapeza CDO XIII, Ltd. and Trapeza CDO XIII, Inc. TCM and the Trapeza CDO issuers are collectively referred to as Trapeza. The complaint includes causes of action against TCM for fraud, negligent misrepresentation, violation of the Tennessee Securities Act of 1980 and unjust enrichment. First Community alleges, among other things, that it invested in certain CDOs, that the defendant rating agencies assigned inflated investment grade ratings to the CDOs, and that the defendant investment banks, collateral managers and issuers (including Trapeza) fraudulently and/or negligently made “materially false and misleading representations and omissions” that First Community relied on in investing in the CDOs, including both written representations in offering materials and unspecified oral representations. Specifically, with respect to Trapeza, First Community alleges that it purchased $20.0 million of notes in the D tranche of the Trapeza CDO XIII transaction from J.P. Morgan. The Court dismissed this matter in June 2012. First Community filed a Notice of Appeal in July 2012.
We are also a party to various routine legal proceedings arising out of the ordinary course of business. Management believes that none of these actions, individually or, in the aggregate, will have a material adverse effect on our consolidated financial condition or operations.
Real Estate Commitments. As a specialized asset manager, we sponsor investment funds in which we may make an equity investment along with outside investors. This equity investment is generally based on a percentage of funds raised and varies among investment programs. With respect to RRE Opportunity REIT, we have committed to invest 1% of the equity raised to a maximum amount of $2.5 million. This commitment has been reduced to $262,000 as of March 31, 2013 as a result of funds already invested to date.
In July 2011, we entered into an agreement with one of tenant in common, or TIC, programs we sponsored and manage. This agreement requires us to fund up to $1.9 million for capital improvements for the TIC property over the next two years.  The Company advanced funds totaling $1.7 million as of March 31, 2013.
The liabilities for the real estate commitments will be recorded in the future as the amounts become due and payable.
General Corporate Commitments. We are also a party to employment agreements with certain executives that provide for compensation and other benefits, including severance payments under specified circumstances.
As of March 31, 2013, except for the clawback liability recorded for the two Trapeza entities and executive compensation, we do not believe it is probable that any payments will be required under any of our commitments and contingencies, and accordingly, no liabilities for these obligations have been recorded in the consolidated financial statements.



Variable Interest Entities
In general, VIEs are entities in which equity investors lack the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. We have variable interests in VIEs through our management contracts and investments in various securitization entities, including CDO issuers. Since we serve as the asset manager for the investment entities we sponsored and manage, we are generally deemed to have the power to direct the activities of the VIE that most significantly impact the entity's economic performance. In the case of an interest in a VIE we manage, we will perform an additional qualitative analysis to determine if our interest (including any investment as well as any management fees that qualify as variable interests) could absorb losses or receive benefits that could potentially be significant to the VIE. This analysis considers the most optimistic and pessimistic scenarios of potential economic results that could reasonably be experienced by the VIE. We then compare the benefits we would receive (in the optimistic scenario) or the losses we would absorb (in the pessimistic scenario) as compared to all benefits and losses absorbed by the VIE in total. If the benefits or losses we would absorb were significant as compared to total benefits and losses absorbed by all variable interest holders, then we would conclude we are the primary beneficiary.
Our investments in RSO, RRE Opportunity REIT, and our investments in the structured finance entities that hold investments in trust preferred assets, which we refer to as our Trapeza entities, and asset-backed securities, which we refer to as our Ischus entities, were all determined to be VIEs that we do not consolidate as we do not have the obligation of, or right to, losses or earnings that would be significant to those entities.  With respect to RRE Opportunity REIT, we have advanced offering costs that are being reimbursed as the REIT raises additional equity.  Except for those advances, we have not provided financial or other support to these VIEs and have no liabilities, contingent liabilities, or guarantees (implicit or explicit) related to these VIEs at March 31, 2013.

Critical Accounting Policies
     The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues, costs and expenses, and related disclosure of contingent assets and liabilities. We make estimates of our allowance for credit losses, the valuation allowance against our deferred tax assets, discounts and collectability of management fees, the valuation of stock-based compensation, and in determining whether a decrease in the fair value of an investment is an other-than-temporary impairment. The financial fund management segment makes assumptions in determining the fair value of our investments in securities and in estimating the liability, if any, for clawback provisions on certain of our partnership interests. We used assumptions, specifically inputs to the Black-Scholes pricing model and the discounted cash flow model, in computing the fair value of the Senior Notes and related warrants. On an on-going basis, we evaluate our estimates, which are based on historical experience and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
We are exposed to various market risks from changes in interest rates. Fluctuations in interest rates can impact our results of operations, cash flows and financial position. We manage this risk through regular operating and financing activities. The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates. The range of changes presented reflects our view of changes that are reasonably possible over a one-year period and provides indicators of how we view and manage our ongoing market risk exposures. Our analysis does not consider other possible effects that could impact our business.
Debt
At March 31, 2013, there were no borrowings outstanding under our two secured revolving credit facilities.
All other debt, as of March 31, 2013, was at fixed rates of interest and, therefore, not subject to interest rate fluctuation.
Trading Securities
Our trading security investments are a source of market risk. As of March 31, 2013, our trading security portfolio was comprised of $3.8 million of investments in equity and debt securities. Trading securities are recorded at fair value and changes in the fair value are included in operations. Assuming an immediate 10% decrease in the market value of these investments as of March 31, 2013, the hypothetical loss would have been approximately $377,000.



ITEM 4.    CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision of our chief executive officer and chief financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, and as a result of the material weakness in our internal controls over financial reporting discussed in "Remediation of Material Weakness" below, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective for the period covered by this report.
Changes in Internal Control Over Financial Reporting
Other than the changes discussed below that were made in the first fiscal quarter ended March 31, 2013, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Remediation of Material Weakness
As described in Item 9A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2012, management identified various remedial steps to be implemented with respect to the material weakness in internal control over financial reporting disclosed in that item.  We designed our remediation efforts, as outlined in the Annual Report, to address the material weakness identified by management in connection with the valuation of two of our legacy real estate investments and to strengthen our internal control over financial reporting.  As of March 31, 2013, we have taken steps to address the material weakness and to improve our internal control over financial reporting, as follows:
•
analyzed and confirmed the accuracy of any significant changes in the methods and assumptions used in valuing our legacy real estate portfolio; and
•
formalized our new documentation processes and procedures relative to these valuations.
Subject to satisfactory completion of the design and testing of these processes and procedures for effectiveness, management believes that the implementation of these new control processes and procedures will remediate the material weakness in its internal control over financial reporting and, as a result, its disclosure controls and procedures.



PART II. OTHER INFORMATION

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information about purchases by us during the quarter ended March 31, 2013 of equity securities that are registered under Section 12 of the Securities Exchange Act of 1934:
Issuer Purchases of Equity Securities
Period
 
Total Number of Shares Purchased
 
Average Price
Paid per Share (1)
 
Total Number
of Shares
Purchased as Part
of Publicly Announced
Plans or Programs
 
Maximum Number of Shares (or Approximate Dollar Value)
that May Yet be Purchased
Under the Plans or Programs
January 1 to January 31, 2013
 
7,973

 
$
6.88

 
382,915

 
610,916

February 1 to February 28, 2013
 
—

 
$
—

 
382,915

 
610,916

March 1 to March 31, 2013
 
—

 
$
—

 
382,915

 
610,916

Total
 
7,973

 
$
6.88

 
 
 
 

 
(1)
The average price per share as reflected above includes broker fees and commissions.

On August 1, 2012, our Board of Directors authorized the repurchase of up to 5% of our outstanding common shares. Share repurchases may be made from time to time through open market purchases or privately negotiated transactions at our discretion and in accordance with the rules of the U.S. Securities and Exchange Commission, as applicable. The amount and timing of any repurchases will depend on market conditions and other factors.


ITEM 6.    EXHIBITS
Exhibit No.
 
Description
3.1
 
Restated Certificate of Incorporation of Resource America. (1)
3.2
 
Amended and Restated Bylaws of Resource America. (1)
4.1
 
Note Purchase Agreement (including the form of Senior Note and form of Warrant). (2)
4.1 (a)
 
Form of 9% Senior Note due 2015. (14)
10.1(a)
 
Amended and Restated Loan and Security Agreement, dated March 10, 2011, between Resource America, Inc. and TD Bank, N.A. (5)
10.1(b)
 
First Amendment to the Amended and Restated Loan and Security Agreement, dated as of November 29, 2011, between Resource America, Inc. and TD Bank, N.A. (7)
10.1(c)
 
Second Amendment to the Amended and Restated Loan and Security Agreement and Joinder to Loan Documents, dated as of February 15, 2012, between Resource America, Inc. and TD Bank, N.A and the Joining Guarantors set forth therein. (11)
10.1(d)
 
Third Amendment to the Amended and Restated Loan and Security Agreement and Joinder to Loan Documents, dated as of November 16, 2012, between Resource America, Inc. and TD Bank, N.A and the Joining Guarantors set forth therein. (13)
10.2
 
Amended and Restated Employment Agreement between Michael S. Yecies and Resource America, Inc., dated December 29, 2008. (3)
10.3
 
Amended and Restated Employment Agreement between Thomas C. Elliott and Resource America, Inc., dated December 29, 2008. (3)
10.4
 
Amended and Restated Employment Agreement between Jeffrey F. Brotman and Resource America, Inc., dated December 29, 2008. (3)
10.5
 
Amended and Restated Employment Agreement between Jonathan Z. Cohen and Resource America, Inc., dated December 29, 2008. (3)
10.6
 
Amended and Restated Employment Agreement between Steven J. Kessler and Resource America, Inc., dated December 29, 2008. (3)
10.7(a)
 
Loan Agreement between and among Republic First Bank (d/b/a Republic Bank) and Resource Capital Investor, Inc. and Resource Properties XXX, Inc. (4)
10.7(b)
 
Loan Modification Agreement between and among Republic First Bank (d/b/a Republic Bank) and Resource Capital Investor, Inc. and Resource Properties XXX, Inc. (6)
10.7(c)
 
Second Loan Modification Agreement between and among Republic First Bank (d/b/a Republic Bank) and Resource Capital Investor, Inc. and Resource Properties XXX, Inc. (9)
10.7(d)
 
Third Loan Modification Agreement between and among Republic First Bank (d/b/a Republic Bank) and Resource Capital Investor, Inc. and Resource Properties XXX, Inc. (12)
10.8
 
Settlement Agreement, dated January 9, 2012, by and among Raging Capital Group and Resource America, Inc. (8)
10.9
 
Sale and Purchase Agreement between Resource America, Inc. and CVC Capital Partners SICAV-FIS, S.A. dated December 29, 2011. (10)
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
 
Certification of Chief Executive Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
 
Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1
 
Stock Purchase Agreement by and among LEAF Commercial Capital, Inc., LEAF Financial Corporation, Resource TRS, Inc., Resource Capital Corp., Resource America, Inc. and the Purchasers named therein, dated November 16, 2011. (10)
99.2
 
Amended and Restated Certificate of Incorporation of LEAF Commercial Capital, Inc., dated November 16, 2011. (10)
99.3
 
LEAF Commercial Capital, Inc. Stockholders' Agreement, dated November 16, 2011. (10)

101
 
Interactive Data Files


 
(1)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended December 31, 1999 and by this reference incorporated herein.
(2)
Files previously as an exhibit to our Current Report on Form 8-K filed on October 1, 2009 and by this reference incorporated herein.
(3)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2008 and by this reference incorporated herein.
(4)
Filed previously as an exhibit to our Current Report on Form 8-K filed on March 3, 2011 and by this reference incorporated herein.
(5)
Filed previously as an exhibit to our Current Report on Form 8-K filed on March 15, 2011 and by this reference incorporated herein.
(6)
Filed previously as an exhibit to our Current Report on Form 8-K filed on September 28, 2011 and by this reference incorporated herein.
(7)
Filed previously as an exhibit to our Current Report on Form 8-K filed on December 2, 2011 and by this reference incorporated herein.
(8)
Filed previously as an exhibit to our Current Report on Form 8-K filed on January 11, 2012 and by this reference incorporated herein.
(9)
Filed previously as an exhibit to our Current Report on Form 8-K filed on January 17, 2012 and by this reference incorporated herein.
(10)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2011, and by this reference incorporated herein.
(11)
Filed previously as an exhibit to our Current Report on Form 8-K filed on February 15, 2012, and by this reference incorporated herein.
(12)
Filed previously as an exhibit to our Current Report on Form 8-K filed on October 31, 2012 and by this reference incorporated herein.
(13)
Filed previously as an exhibit to our Current Report on Form 8-K filed on November 19, 2012 and by this reference incorporated herein.
(14)
Filed previously as an exhibit to our Current Report on Form 8-K filed on December 18, 2012 and by this reference incorporated herein.



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
RESOURCE AMERICA, INC.
 
(Registrant)
 
 
 
May 8, 2013
By:
/s/ Thomas C. Elliott
 
 
THOMAS C. ELLIOTT
 
 
Senior Vice President and Chief Financial Office
 
 
 
May 8, 2013
By:
/s/ Arthur J. Miller
 
 
ARTHUR J. MILLER
 
 
Vice President and Chief Accounting Officer