10-Q/A 1 rexi20130331qa.htm 10-Q/A REXI.2013.03.31 Q/A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549 
FORM 10-Q/A
(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 o
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.


QUARTERLY REPORT ON FORM 10-Q/A
For the Three Months Ended March 31, 2013
EXPLANATORY NOTE

In this Report on Form 10-Q/A, we are presenting financial information for the three months ended March 31, 2013 and 2012 to (i) restate our consolidated balance sheets as of March 31, 2013 and the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity and cash flows for three months ended March 31, 2013 and 2012, including the applicable notes to consolidated financial statements, to reflect the consolidation of Resource Capital Corp (“RSO”), and (ii) to reflect the corresponding change in our fiscal year end from September 30th to December 31st to conform to the fiscal year of RSO.



RESOURCE AMERICA, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT
ON FORM 10-Q/A
 
 
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)
(unaudited)
 
March 31,
2013
 
December 31,
2012
 
(Restated)
 
(Restated)
ASSETS
 
 
 
Cash
$
15,372

 
$
11,899

Restricted cash
544

 
638

Receivables
403

 
468

Receivables from managed entities and related parties, net
29,929

 
30,618

Investments in real estate, net
17,103

 
18,041

Investment securities, at fair value
9,821

 
10,576

Investments in unconsolidated loan manager
37,803

 
37,221

Investments in unconsolidated entities
13,395

 
13,156

 
 
 
 
     Assets of consolidated variable interest entity ("VIE") - RSO (see Note 18):
 
 
 
   Cash and cash equivalents (including restricted cash)
179,792

 
179,390

   Investments, at fair value
275,174

 
256,433

   Loans
1,732,980

 
1,849,428

   Investment in real estate and unconsolidated entities
123,453

 
120,706

   Other assets
55,454

 
70,600

     Total assets of consolidated VIE - RSO
2,366,853

 
2,476,557

 
 
 
 
Property and equipment, net
2,446

 
2,590

Deferred tax assets, net
28,542

 
28,274

Other assets
6,567

 
6,726

Total assets
$
2,528,778

 
$
2,636,764

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Liabilities:
 

 
 

Accrued expenses and other liabilities
$
18,650

 
$
21,559

Payables to managed entities and related parties
3,040

 
3,536

Borrowings
20,746

 
21,040

Liabilities of consolidated VIE - RSO (see Note 18):
 
 
 
Borrowings
1,649,840

 
1,785,600

Other liabilities
58,664

 
71,239

Total liabilities of consolidated VIE - RSO
1,708,504

 
1,856,839

   Total liabilities
1,750,940

 
1,902,974

 
 
 
 
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 30,069,822 shares issued (including nonvested restricted stock of 437,661 and 604,353), respectively
296

 
295

Additional paid-in capital
286,340

 
286,048

Accumulated deficit
(29,580
)
 
(29,486
)
Treasury stock, at cost; 9,915,167 and 9,914,090 shares, respectively
(103,446
)
 
(103,472
)
Accumulated other comprehensive loss
(2,325
)
 
(2,197
)
Total stockholders’ equity
151,285

 
151,188

Noncontrolling interests
237

 
279

Noncontrolling interests of consolidated VIE - RSO
626,316

 
582,323

    Total equity
777,838

 
733,790

 
$
2,528,778

 
$
2,636,764


The accompanying notes are an integral part of these statements
4


RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
Three Months Ended
 
March 31,
 
2013
 
2012
 
(Restated)
 
(Restated)
REVENUES:
 
 
 
Real estate (includes revenues of $2,288 and $3,300 related to RSO)
$
11,340

 
$
9,716

Financial fund management (includes revenues of $381 and $1,577 related to RSO)
4,287

 
6,304

Commercial finance
(178
)
 
(1,240
)
 
15,449

 
14,780

Revenues from consolidated VIE - RSO (see Note 18)
30,578

 
28,726

Elimination of consolidated revenues attributed to operating segments
(2,700
)
 
(3,510
)
    Total revenues
43,327

 
39,996

COSTS AND EXPENSES:
 

 
 

Real estate
9,440

 
7,407

Financial fund management
2,528

 
4,379

Commercial finance
45

 
230

Restructuring expenses
—

 
365

General and administrative
2,153

 
2,467

Provision for credit losses
338

 
2,962

Depreciation and amortization
416

 
535

 
14,920

 
18,345

Expenses from consolidated VIE - RSO (see Note 18)
16,188

 
11,630

Elimination of consolidated expenses attributed to operating segments
(2,654
)
 
(3,457
)
    Total expenses
28,454

 
26,518

OPERATING INCOME
14,873

 
13,478

 
 
 
 
OTHER INCOME (EXPENSE):
 

 
 

Other-than-temporary impairment on investments
(214
)
 
(74
)
Interest expense
(494
)
 
(645
)
Other income, net
189

 
125

 
(519
)
 
(594
)
Elimination of consolidated VIE - RSO other income attributable to operating segments
31

 
33

 
(488
)
 
(561
)
Income from continuing operations before taxes
14,385

 
12,917

Income tax provision - RAI
(146
)
 
(1,323
)
Income tax provision - RSO
1,762

 
2,615

Income from continuing operations
12,769

 
11,625

Loss from discontinued operations, net of tax
(2
)
 
(16
)
Net income
12,767

 
11,609

Net loss attributable to noncontrolling interests - RAI
43

 
39

Net income attributable to noncontrolling interests of consolidated VIE - RSO
(12,314
)
 
(14,030
)
Net income (loss) attributable to common shareholders
$
496

 
$
(2,382
)
 
 
 
 
 
 
 
 

The accompanying notes are an integral part of these statements
5


 
 
 
 
 
 
 
 
RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS - (Continued)
(in thousands, except per share data)
(unaudited)
 
 
 
 
 
Three Months Ended
 
March 31,
 
2013
 
2012
 
(Restated)
 
(Restated)
Amounts attributable to common shareholders:
 

 
 

Income (loss) from continuing operations
$
498

 
$
(2,366
)
Discontinued operations
(2
)
 
(16
)
Net income (loss)
$
496

 
$
(2,382
)
 
 
 
 
Basic earnings (loss) per share:
 

 
 

Continuing operations
$
0.02

 
$
(0.12
)
Discontinued operations
—

 
—

Net income (loss)
$
0.02

 
$
(0.12
)
Weighted average shares outstanding
20,124

 
19,437

 
 
 
 
Diluted earnings (loss) per share:
 

 
 

Continuing operations
$
0.02

 
$
(0.12
)
Discontinued operations
—

 
—

Net income (loss)
$
0.02

 
$
(0.12
)
Weighted average shares outstanding
21,815

 
19,437




The accompanying notes are an integral part of these statements
6


RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
Three Months Ended
 
March 31,
 
2013
 
2012
 
(Restated)
 
(Restated)
Net income
$
12,767

 
$
11,609

 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized losses on investment securities available-for-sale, net of tax of $(217) and $(64)
(351
)
 
(109
)
Reclassification adjustments for losses realized, net of tax of $83 and $28
131

 
46

 
(220
)
 
(63
)
Minimum pension liability- reclassification adjustments for losses realized, net of tax of $9 and $36
87

 
47

Unrealized gains on hedging contracts, net of tax of $5 and $71
5

 
101

Subtotal - activity related to RAI
(128
)
 
85

 
 
 
 
Activity of consolidated VIE - RSO
 
 
 
Reclassification adjustments for losses included in net income
55

 
12

Unrealized gains on available-for-sale securities, net
4,541

 
10,587

Reclassification adjustments associated with unrealized (gains) losses from interest rate hedges included in net income
(627
)
 
56

Unrealized gains (losses) on derivatives, net
1,334

 
(93
)
   Total activity related to consolidated VIE - RSO
5,303

 
10,562

Subtotal - other comprehensive income
5,175

 
10,647

Comprehensive income
17,942

 
22,256

Comprehensive income attributable to noncontrolling interests
(17,574
)
 
(24,553
)
Comprehensive income attributable to common shareholders
$
368

 
$
(2,297
)


The accompanying notes are an integral part of these statements
7


RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
THREE 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
 
Noncontrolling
Interests - RSO
 
Total Equity
 
 
 
 
 
 
 
(Restated)
 
 
 
(Restated)
 
(Restated)
 
(Restated)
 
 
 
(Restated)
Balance, December 31, 2012 - Restated
20,155,732

 
$
295

 
$
286,048

 
$
(29,486
)
 
$
(103,472
)
 
$
(2,197
)
 
$
151,188

 
$
279

 
$
582,323

 
$
733,790

Net income
—

 
—

 
—

 
496

 
—

 
—

 
496

 
(43
)
 
12,314

 
12,767

Issuance of common shares
—

 
1

 
—

 
—

 
—

 
—

 
1

 
—

 
—

 
1

Treasury shares issued
10,452

 
—

 
(21
)
 
—

 
108

 
—

 
87

 
—

 
—

 
87

Stock-based compensation
12,594

 
—

 
313

 
—

 
—

 
—

 
313

 
—

 
—

 
313

Repurchases of common stock
(11,529
)
 
—

 
—

 
—

 
(82
)
 
—

 
(82
)
 
—

 
—

 
(82
)
Cash dividends
—

 
—

 


 
(590
)
 
—

 
—

 
(590
)
 
—

 
—

 
(590
)
Distributions
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1

 
—

 
1

Activity of consolidated VIE - RSO
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
26,376

 
26,376

Other comprehensive (loss) income
—

 
—

 
—

 
—

 
—

 
(128
)
 
(128
)
 
—

 
5,303

 
5,175

Balance, March 31, 2013 - Restated
20,167,249

 
$
296

 
$
286,340

 
$
(29,580
)
 
$
(103,446
)
 
$
(2,325
)
 
$
151,285

 
$
237

 
$
626,316

 
$
777,838

 

The accompanying notes are an integral part of this statement
8


RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended
 
March 31,
 
2013
 
2012
 
(Restated)
 
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
12,767

 
$
11,609

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
456

 
606

Provision for credit losses
338

 
2,962

Other-than-temporary impairment on investments
214

 
74

Unrealized gain on trading securities
(745
)
 
—

Equity in earnings (losses) of unconsolidated entities
(1,261
)
 
329

Distributions from unconsolidated entities
716

 
858

Gain on sale of investment securities, net
(517
)
 
(5
)
Gain on sale of assets
(1,606
)
 
—

Deferred income tax benefit
(146
)
 
(1,323
)
Equity-based compensation issued
293

 
319

Trading securities purchases and sales, net
2,831

 
—

Loss from discontinued operations
2

 
16

Changes in operating assets and liabilities
4,171

 
(2,864
)
Changes in cash attributable to operations of consolidated VIE- RSO
27,633

 
(14,109
)
Net cash provided by (used in) operating activities
45,146

 
(1,528
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(171
)
 
11

Payments received on real estate loans and real estate
2,049

 
—

Investments in real estate and unconsolidated real estate entities
(509
)
 
(376
)
Principal payments (paid) received on leases and loans
(3
)
 
6

Purchase of loans and investments
(1,526
)
 
(136
)
Proceeds from sale of loans and investments
—

 
70

Purchase of loans and securities by consolidated VIE - RSO
(209,991
)
 
(167,505
)
Principal payments and proceeds from sales received by consolidated VIE - RSO
275,663

 
162,632

(Increase) decrease in restricted cash of consolidated VIE - RSO
(19,241
)
 
9,196

Other investing activity of consolidated VIE - RSO
(4,499
)
 
1,101

Net cash provided by investing activities
41,772

 
4,999

CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Increase in borrowings
2,000

 
—

Principal payments on borrowings
(2,111
)
 
(101
)
Dividends paid
(589
)
 
(566
)
Repurchase of common stock
(54
)
 
(16
)
Other financing activities
—

 
(44
)
Increase in restricted cash
95

 
—

Net repayments of debt by consolidated VIE - RSO
(104,196
)
 
(9,537
)
Dividends paid on common stock of consolidated VIE - RSO
(20,422
)
 
(19,474
)
Net proceeds from issuance of common stock by consolidated VIE - RSO
44,862

 
24,158

Other financing activities of consolidated VIE - RSO
(2,535
)
 
(582
)
Net cash used in financing activities
(82,950
)
 
(6,162
)
CASH FLOWS FROM DISCONTINUED OPERATIONS:
 

 
 

Operating activities
(495
)
 
(194
)
Net cash used in discontinued operations
(495
)
 
(194
)
 
 
 
 
Increase (decrease) in cash
3,473

 
(2,885
)
Cash, beginning of year
11,899

 
12,803

Cash, end of period
$
15,372

 
$
9,918


The accompanying notes are an integral part of these statements
9

RESOURCE AMERICA, INC.
NOTES TO RESTATED 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 Company owns 2.7% of RSO's outstanding common stock as of March 31, 2013. RSO has been reflected on a consolidated basis with the Company's financial statements (see Notes 2 and 18).
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 results of operations for the three months ended March 31, 2013 may not necessarily be indicative of the results of operations for the full year ending December 31, 2013.
NOTE 2 - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 2013 AND 2012 AND AS OF MARCH 31, 2013 AND DECEMBER 31, 2012 AND CHANGE IN
FISCAL YEAR
On September 19, 2013, the Audit Committee of the Board of Directors concluded that it was necessary to restate the audited financial statements set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012 and certain of the unaudited financial statements in its Quarterly Reports on Form 10-Q, including the three and six months ended March 31, 2013 and 2012. The restatement reflects the consolidation of RSO which the Company previously treated as an unconsolidated variable interest entity ("VIE"). The Company also determined to change its fiscal year end from September 30th to December 31st in order to conform to the fiscal year of RSO. Accordingly, the Company filed an amended Quarterly Report on Form 10Q-T which reflects the restated unaudited consolidated balance sheet as of December 31, 2012.
The impact of consolidating RSO to the Company's consolidated net income attributable to common shareholders for the three months ended March 31, 2013 and 2012 was as follows (in thousands):
•
Dividends from RSO were eliminated, which reduced net income attributable to common shareholders by $556,000 and $505,000; and
•
The Company's interests in the earnings of RSO increased consolidated net income attributable to common shareholders by $299,000 and $431,000.





    





    



    

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


    
The following sets forth the effect of the restatement on the applicable line items in the Company's consolidated balance sheet as of March 31, 2013 (in thousands) (unaudited):
 
 
 
Restatement Adjustments
 
 
 
As Previously Reported
 
RSO
 
Eliminations
 
As Restated
ASSETS
 
 
 
 
 
 
 
Cash
$
15,372

 
$
—

 
$
—

 
$
15,372

Restricted cash
544

 
—

 
—

 
544

Receivables
403

 
—

 
—

 
403

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

 
—

 
(2,399
)
 
29,929

Investments in real estate, net
17,103

 
—

 
—

 
17,103

Investment securities, at fair value
28,207

 
—

 
(18,386
)
 
9,821

Investments in unconsolidated loan manager
37,803

 
—

 
—

 
37,803

Investments in unconsolidated entities
13,395

 
—

 
—

 
13,395

Assets of consolidated VIE - RSO:
 
 
 
 
 
 


Cash and cash equivalents (including restricted cash)
—

 
179,792

 
—

 
179,792

Investments, at fair value
—

 
275,174

 
—

 
275,174

Loans
—

 
1,734,550

 
(1,570
)
 
1,732,980

Investments in real estate and unconsolidated entities
—

 
123,561

 
(108
)
 
123,453

Other assets
—

 
55,486

 
(32
)
 
55,454

  Total assets of consolidated VIE - RSO
—

 
2,368,563

 
(1,694
)
 
2,366,853

Property and equipment, net
2,446

 
—

 
—

 
2,446

Deferred tax assets, net
35,359

 
—

 
(6,817
)
 
28,542

Other assets
6,567

 
—

 
—

 
6,567

           Total assets
$
189,527

 
$
2,368,563

 
$
(29,312
)
 
$
2,528,778

 
 
 
 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Accrued expenses and other liabilities
$
18,651

 
$
—

 
$
(1
)
 
$
18,650

Payables to managed entities and related parties
3,160

 
—

 
(120
)
 
3,040

Borrowings
22,316

 
—

 
(1,570
)
 
20,746

Liabilities of consolidated VIE - RSO:
 
 
 
 
 
 


   Borrowings
—

 
1,649,840

 
—

 
1,649,840

   Other liabilities
—

 
60,975

 
(2,311
)
 
58,664

           Total liabilities of consolidated VIE - RSO
—

 
1,710,815

 
(2,311
)
 
1,708,504

            Total liabilities
44,127

 
1,710,815

 
(4,002
)
 
1,750,940

 
 
 
 
 
 
 
 
Commitments and contingencies

 

 

 

 
 
 
 
 
 
 
 
Equity:
 
 
 
 
 
 
 
Preferred stock
—

 
—

 
—

 
—

Common stock
296

 
—

 
—

 
296

Additional paid-in capital
286,340

 
—

 
—

 
286,340

Accumulated deficit
(26,983
)
 
—

 
(2,597
)
 
(29,580
)
Treasury stock, at cost
(103,446
)
 
—

 
—

 
(103,446
)
Accumulated other comprehensive (loss) income
(11,044
)
 
—

 
8,719

 
(2,325
)
Total stockholders’ equity
145,163

 
—

 
6,122

 
151,285

Noncontrolling interests
237

 
—

 
—

 
237

Noncontrolling interests attributable to RSO
—

 
657,748

 
(31,432
)
 
626,316

            Total equity
145,400

 
657,748

 
(25,310
)
 
777,838

 
$
189,527

 
$
2,368,563

 
$
(29,312
)
 
$
2,528,778

    

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


The following sets forth the effect of the restatement on the applicable line items in the Company's consolidated statement of operations for the three months ended March 31, 2013 (in thousands) (unaudited):
 
 
 
Restatement Adjustments
 
 
 
As Previously Reported
 
RSO
 
Eliminations
 
As Restated
REVENUES:
 
 
 
 
 
 
 
Real estate
$
11,340

 
$
—

 
$
—

 
$
11,340

Financial fund management
4,287

 
—

 
—

 
4,287

Commercial finance
(178
)
 
—

 
—

 
(178
)
Revenues from consolidated VIE - RSO
—

 
30,578

 
—

 
30,578

Elimination of consolidated revenues attributed to operating segments
—

 
—

 
(2,700
)
 
(2,700
)
Total revenues
15,449

 
30,578

 
(2,700
)
 
43,327

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Real estate
9,440

 
—

 
—

 
9,440

Financial fund management
2,528

 
—

 
—

 
2,528

Commercial finance
45

 
—

 
—

 
45

General and administrative
2,157

 
—

 
(4
)
 
2,153

Provision for credit losses
338

 
—

 
—

 
338

Depreciation and amortization
416

 
—

 
—

 
416

Expenses from consolidated VIE - RSO
—

 
17,950

 
(1,762
)
 
16,188

Elimination of consolidated expenses attributed to operating segments
—

 
—

 
(2,654
)
 
(2,654
)
Total expenses
14,924

 
17,950

 
(4,420
)
 
28,454

OPERATING INCOME
525

 
12,628

 
1,720

 
14,873

 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Other-than-temporary impairment on investments
(214
)
 
—

 
—

 
(214
)
Interest expense
(494
)
 
—

 
—

 
(494
)
Other income, net
740

 
—

 
(551
)
 
189

Elimination of consolidated VIE income attributed to operating segments
—

 
—

 
31

 
31

 
32

 
—

 
(520
)
 
(488
)
Income from continuing operations before taxes
557

 
12,628

 
1,200

 
14,385

Income tax (benefit) provision
(146
)
 
—

 
1,762

 
1,616

Income from continuing operations
703

 
12,628

 
(562
)
 
12,769

Loss from discontinued operations, net of tax
(2
)
 
—

 
—

 
(2
)
Net income
701

 
12,628

 
(562
)
 
12,767

Net loss attributable to noncontrolling interests - RAI
43

 
—

 
—

 
43

Net income attributable to noncontrolling interests of consolidated VIE - RSO
—

 
(1,102
)
 
(11,212
)
 
(12,314
)
Net income attributable to common shareholders
$
744

 
$
11,526

 
$
(11,774
)
 
$
496

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restatement Adjustments
 
 
 
As Previously Reported
 
RSO
 
Eliminations
 
As Restated
Amounts attributable to common shareholders:
 
 
 
 
 
 
 
Income from continuing operations
$
746

 
 
 
 
 
$
498

Discontinued operations
(2
)
 
 
 
 
 
(2
)
Net income
$
744

 
 
 
 
 
$
496

 
 
 
 
 
 
 
 
Basic earnings per share:
 

 
 
 
 
 
 
Continuing operations
$
0.04

 
 
 
 
 
$
0.02

Discontinued operations
—

 
 
 
 
 
—

Net income
$
0.04

 
 
 
 
 
$
0.02

Weighted average shares outstanding
20,124

 
 
 
 
 
20,124

 
 
 
 
 
 
 
 
Diluted earnings per share:
 

 
 
 
 
 
 

Continuing operations
$
0.03

 
 
 
 
 
$
0.02

Discontinued operations
—

 
 
 
 
 
—

Net income
$
0.03

 
 
 
 
 
$
0.02

Weighted average shares outstanding
21,815

 
 
 
 
 
21,815



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


The following sets forth the effect of the restatement on the applicable line items in the Company's consolidated statement of operations for the three months ended March 31, 2012 (in thousands) (unaudited):
 
 
 
Restatement Adjustments
 
 
 
As Previously Reported
 
RSO
 
Eliminations
 
As Restated
REVENUES:
 
 
 
 
 
 
 
Real estate
$
9,716

 
$
—

 
$
—

 
$
9,716

Financial fund management
6,304

 
—

 
—

 
6,304

Commercial finance
(1,240
)
 
—

 
—

 
(1,240
)
Revenues from consolidated VIE - RSO
—

 
28,726

 
—

 
28,726

Elimination of consolidated revenues attributed to operating segments
—

 
—

 
(3,510
)
 
(3,510
)
Total revenues
14,780

 
28,726

 
(3,510
)
 
39,996

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Real estate
7,407

 
—

 
—

 
7,407

Financial fund management
4,379

 
—

 
—

 
4,379

Commercial finance
230

 
—

 
—

 
230

General and administrative
2,467

 
—

 
—

 
2,467

Restructuring charges
365

 
—

 
—

 
365

Provision for credit losses
2,962

 
—

 
—

 
2,962

Depreciation and amortization
535

 
—

 
—

 
535

Expenses from consolidated VIE - RSO
—

 
14,245

 
(2,615
)
 
11,630

Elimination of consolidated expenses attributed to operating segments
—

 
—

 
(3,457
)
 
(3,457
)
Total expenses
18,345

 
14,245

 
(6,072
)
 
26,518

OPERATING (LOSS) INCOME
(3,565
)
 
14,481

 
2,562

 
13,478

 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Other-than-temporary impairment on investments
(74
)
 
—

 
—

 
(74
)
Interest expense
(645
)
 
—

 
—

 
(645
)
Other income, net
630

 
—

 
(505
)
 
125

Elimination of consolidated VIE income attributed to operating segments
—

 
—

 
33

 
33

 
(89
)
 
—

 
(472
)
 
(561
)
(Loss) income from continuing operations before taxes
(3,654
)
 
14,481

 
2,090

 
12,917

Income tax (benefit) provision
(1,323
)
 
—

 
2,615

 
1,292

Income (loss) from continuing operations
(2,331
)
 
14,481

 
(525
)
 
11,625

Loss from discontinued operations, net of tax
(16
)
 
—

 
—

 
(16
)
Net (loss) income
(2,347
)
 
14,481

 
(525
)
 
11,609

Net loss attributable to noncontrolling interests - RAI
39

 
—

 
—

 
39

Net income attributable to noncontrolling interests of consolidated VIE - RSO
—

 
—

 
(14,030
)
 
(14,030
)
Net (loss) income attributable to common shareholders
$
(2,308
)
 
$
14,481

 
$
(14,555
)
 
$
(2,382
)





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





 
 
 
Restatement Adjustments
 
 
 
As Previously Reported
 
RSO
 
Eliminations
 
As Restated
Amounts attributable to common shareholders:
 
 
 
 
 
 
 
Loss from continuing operations
$
(2,292
)
 
 
 
 
 
$
(2,366
)
Discontinued operations
(16
)
 
 
 
 
 
(16
)
Net loss
$
(2,308
)
 
 
 
 
 
$
(2,382
)
 
 
 
 
 
 
 
 
Basic earnings per share:
 

 
 
 
 
 
 
Continuing operations
$
(0.12
)
 
 
 
 
 
$
(0.12
)
Discontinued operations
—

 
 
 
 
 
—

Net loss
(0.12
)
 
 
 
 
 
(0.12
)
Weighted average shares outstanding
19,437

 
 
 
 
 
19,437

 
 
 
 
 
 
 
 
Diluted earnings per share:
 

 
 
 
 
 
 
Continuing operations
$
(0.12
)
 
 
 
 
 
$
(0.12
)
Discontinued operations
—

 
 
 
 
 
—

Net loss
(0.12
)
 
 
 
 
 
(0.12
)
Weighted average shares outstanding
19,437

 
 
 
 
 
19,437




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


The following sets forth the effect of the restatement on the applicable line items in the Company's consolidated statement of comprehensive income for the three months ended March 31, 2013 (in thousands) (unaudited):    
 
 
 
Restatement Adjustments
 
 
 
As Previously Reported
 
RSO
 
Eliminations
 
As Restated
Net income
$
701

 
$
12,628

 
$
(562
)
 
$
12,767

 
 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Unrealized gains (losses) on investment securities available-for-sale
2,148

 
—

 
(2,499
)
 
(351
)
Reclassification adjustment for losses realized, net of tax
131

 
—

 
—

 
131

 
2,279

 
—

 
(2,499
)
 
(220
)
Reclassification adjustment for minimum pension liability losses realized, net of tax
89

 
—

 
(2
)
 
87

Unrealized gains on hedging contracts, net of tax
4

 
—

 
1

 
5

Subtotal - activity related to RAI
2,372

 
—

 
(2,500
)
 
(128
)
 
 
 
 
 
 
 
 
Activity related to consolidated VIE - RSO:
 
 
 
 
 
 
 
Reclassifications adjustment for losses included in net income
—

 
55

 
—

 
55

Unrealized gains on available-for-sale securities, net
—

 
4,541

 
—

 
4,541

Reclassification adjustments associated with unrealized gains from interest rate hedges included in net income
—

 
(627
)
 
—

 
(627
)
Unrealized gains on derivatives, net
—

 
1,334

 
—

 
1,334

Subtotal activity related to consolidated VIE - RSO
—

 
5,303

 
—

 
5,303

Subtotal - other comprehensive income
2,372

 
5,303

 
(2,500
)
 
5,175

Comprehensive income
3,073

 
17,931

 
(3,062
)
 
17,942

Comprehensive loss (income) attributable to noncontrolling interests
43

 
209

 
(17,826
)
 
(17,574
)
Comprehensive income attributable to common shareholders
$
3,116

 
$
18,140

 
$
(20,888
)
 
$
368



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



The following sets forth the effect of the restatement on the applicable line items in the Company's consolidated statement of comprehensive income for the three months ended March 31, 2012 (in thousands) (unaudited):
 
 
 
Restatement Adjustments
 
 
 
As Previously Reported
 
RSO
 
Eliminations
 
As Restated
Net (loss) income
$
(2,347
)
 
$
14,481

 
$
(525
)
 
$
11,609

 
 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Unrealized losses on investment securities available-for-sale
(450
)
 
—

 
341

 
(109
)
Reclassification adjustment for losses realized, net of tax
46

 
—

 
—

 
46

 
(404
)
 
—

 
341

 
(63
)
Reclassification adjustment for minimum pension liability losses realized, net of tax
47

 
—

 
—

 
47

Unrealized gains on hedging contracts, net of tax
101

 
—

 
—

 
101

Subtotal - activity related to RAI
(256
)
 
—

 
341

 
85

 
 
 
 
 
 
 
 
Activity related to consolidated VIE - RSO:
 
 
 
 
 
 
 
Reclassifications adjustment for losses included in net income
—

 
12

 
—

 
12

Unrealized gains on available-for-sale securities, net
—

 
10,587

 
—

 
10,587

Reclassification adjustments associated with unrealized losses from interest rate hedges included in net income
—

 
56

 
—

 
56

Unrealized losses on derivatives, net
—

 
(93
)
 
—

 
(93
)
Subtotal - activity related to consolidated VIE - RSO
—

 
10,562

 
—

 
10,562

Subtotal - other comprehensive (loss) income
(256
)
 
10,562

 
341

 
10,647

 
 
 
 
 
 
 
 
Comprehensive (loss) income
(2,603
)
 
25,043

 
(184
)
 
22,256

Comprehensive income (loss) attributable to noncontrolling interests
39

 
—

 
(24,592
)
 
(24,553
)
Comprehensive (loss) income attributable to
common shareholders
$
(2,564
)
 
$
25,043

 
$
(24,776
)
 
$
(2,297
)

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


The following table presents the consolidated statement of cash flows as originally presented in the March 31, 2013 10-Q for the six months ended March 31, 2013, less the activity for the three months ended December 31, 2012, in order to derive the activity for the three months ended March 31, 2013 as shown in the column labeled "RAI" in the consolidating statement of cash flows that follows the table below (in thousands) (unaudited):
 
For the
Six Months Ended
March 31, 2013
 
For the
Three Months Ended
December 31, 2012
 
 
 
For the
Three Months Ended
March 31, 2013
 
As originally filed
 
As originally filed
 
Reclassifications
 
As presented
CASH FLOWS FROM OPERATING ACTIVITIES:
  
 
 
 
 
 
 
Net (loss) income
$
(159
)
 
$
(860
)
 
$
—

 
$
701

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
1,006

 
550

 
—

 
456

Other-than-temporary impairment on investment securities
214

 
—

 
—

 
214

Provision for credit losses
5,490

 
5,152

 
—

 
338

Unrealized gain on trading securities
(909
)
 
(164
)
 
—

 
(745
)
Equity in earnings of unconsolidated entities
(2,462
)
 
(1,201
)
 
—

 
(1,261
)
Distributions from unconsolidated entities
1,727

 
1,011

 
—

 
716

Gain on sale of assets
(2,437
)
 
(831
)
 
—

 
(1,606
)
Gain on sale of loans and investment securities, net
(824
)
 
(307
)
 
—

 
(517
)
Deferred income tax benefit
(387
)
 
(241
)
 
—

 
(146
)
Equity-based compensation issued
498

 
205

 
—

 
293

Equity-based compensation received
(860
)
 
(206
)
 
—

 
(654
)
Trading securities purchases and sales, net
1,003

 
(1,828
)
 
—

 
2,831

Loss from discontinued operations
8

 
6

 
—

 
2

Changes in operating assets and liabilities
(501
)
 
(4,666
)
 
—

 
4,165

Net cash provided by (used in) operating activities
1,407

 
(3,380
)
 
—

 
4,787

 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
  
 
 
 
 
 
 
Capital expenditures
(251
)
 
(80
)
 
—

 
(171
)
Payments received on real estate loans and real estate
2,761

 
712

 
—

 
2,049

Investments in unconsolidated real estate entities
(1,521
)
 
(1,012
)
 
—

 
(509
)
Principal payments received (paid) on leases and loans
—

 
3

 
—

 
(3
)
Purchase of loans and investments
(2,849
)
 
(1,323
)
 
—

 
(1,526
)
Net cash used in investing activities
(1,860
)
 
(1,700
)
 
—

 
(160
)
 
 
 
 
 
 
 
 

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


 
 
 
 
 
 
 
 
 
For the
Six Months Ended
March 31, 2013
 
For the
Three Months Ended
December 31, 2012
 
 
 
For the
Three Months Ended
March 31, 2013
 
As originally filed
 
As originally filed
 
Reclassifications
 
As presented
CASH FLOWS FROM FINANCING ACTIVITIES:
  
 
 
 
 
 
 
Increase in borrowings
2,000

 
—

 
—

 
2,000

Principal payments on borrowings
(2,340
)
 
(229
)
 
—

 
(2,111
)
Dividends paid
(1,182
)
 
(593
)
 
—

 
(589
)
Repurchase of common stock
(1,132
)
 
(1,078
)
 
—

 
(54
)
Increase in restricted cash
98

 
3

 
—

 
95

Other financing activities
(150
)
 
(150
)
 
—

 
—

Net cash used in financing activities
(2,706
)
 
(2,047
)
 
—

 
(659
)
 
 
 
 
 
 
 
 
CASH FLOWS FROM DISCONTINUED OPERATIONS:
  
 
 
 
 
 
 
Operating activities
(862
)
 
(367
)
 
—

 
(495
)
Net cash used in discontinued operations
(862
)
 
(367
)
 
—

 
(495
)
 
 
 
 
 
 
 
 
(Decrease) increase in cash
(4,021
)
 
(7,494
)
 
—

 
3,473

Cash, beginning of period
19,393

 
19,393

 
—

 
11,899

Cash, end of period
$
15,372

 
$
11,899

 
$
—

 
$
15,372



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


The following sets forth the effect of the restatement on the applicable line items in the Company's consolidated statement of cash flows for the three months ended March 31, 2013 (in thousands) (unaudited):
 
RAI
 
RSO
 
Eliminations
 
Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES:
  
 
 
 
 
 
 
Net income
$
701

 
$
12,628

 
$
(562
)
 
$
12,767

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
456

 
—

 
—

 
456

Other-than-temporary impairment charges
214

 
—

 
—

 
214

Provision for credit losses
338

 
—

 
—

 
338

Unrealized gain on trading securities
(745
)
 
—

 
—

 
(745
)
Equity in earnings of unconsolidated entities
(1,261
)
 
—

 
—

 
(1,261
)
Distributions from unconsolidated entities
716

 
—

 
—

 
716

Gain on sale of assets
(1,606
)
 
—

 
—

 
(1,606
)
Gain on sale of loans and investment securities, net
(517
)
 
—

 
—

 
(517
)
Deferred income tax benefit
(146
)
 
—

 
—

 
(146
)
Equity-based compensation received
(654
)
 
—

 
654

 
—

Equity-based compensation issued
293

 
484

 
(484
)
 
293

Trading securities purchases and sales, net
2,831

 
—

 
—

 
2,831

Loss from discontinued operations
2

 
—

 
—

 
2

Changes in operating assets and liabilities
4,165

 
—

 
6

 
4,171

Change in cash attributable to consolidated VIE - RSO
—

 
27,803

 
(170
)
 
27,633

Net cash provided by operating activities
4,787

 
40,915

 
(556
)
 
45,146

 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
  
 
 
 
 
 
 
Capital expenditures
(171
)
 
—

 
—

 
(171
)
Payments received on real estate loans and real estate
2,049

 
—

 
—

 
2,049

Investments in unconsolidated real estate entities
(509
)
 
—

 
—

 
(509
)
Principal payments received on leases and loans
(3
)
 
—

 
—

 
(3
)
Purchase of loans and securities by consolidated VIE - RSO
—

 
(209,991
)
 
—

 
(209,991
)
Principal payments and proceeds from sales received by consolidated VIE - RSO
—

 
275,663

 
—

 
275,663

Purchase of loans and investments
(1,526
)
 
—

 
—

 
(1,526
)
Decrease in restricted cash - consolidated VIE RSO
—

 
(19,241
)
 
—

 
(19,241
)
Other - consolidated VIE - RSO
—

 
(4,499
)
 
—

 
(4,499
)
Net cash (used in) provided by investing activities
(160
)
 
41,932

 
—

 
41,772

 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
  
 
 
 
 
 
 
Increase in borrowings
2,000

 
—

 
—

 
2,000

Principal payments on borrowings
(2,111
)
 
—

 
—

 
(2,111
)
Net repayments of debt by consolidated VIE - RSO
—

 
(104,196
)
 
—

 
(104,196
)
Dividends paid
(589
)
 
—

 
—

 
(589
)
Dividends paid on common stock by consolidated VIE - RSO
—

 
(20,978
)
 
556

 
(20,422
)
Net proceeds from issuance of common stock by consolidated VIE - RSO
—

 
44,862

 
—

 
44,862

Repurchase of common stock
(54
)
 
—

 
—

 
(54
)
Increase in restricted cash
95

 
—

 
—

 
95

Other - consolidated VIE - RSO
—

 
(2,535
)
 
—

 
(2,535
)
Net cash used in financing activities
(659
)
 
(82,847
)
 
556

 
(82,950
)
 
 
 
 
 
 
 
 
CASH FLOWS FROM DISCONTINUED OPERATIONS:
  
 
 
 
 
 
 
Operating activities
(495
)
 
—

 
—

 
(495
)
Net cash used in discontinued operations
(495
)
 
—

 
—

 
(495
)
 
 
 
 
 
 
 
 
Increase in cash
3,473

 
—

 
—

 
3,473

Cash, beginning of year
11,899

 
—

 
—

 
11,899

Cash, end of period
$
15,372

 
$
—

 
$
—

 
$
15,372


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


The following table present the consolidating statement of cash flows as originally presented in the March 31, 2012 10-Q for the six months ended March 31, 2012, less the activity for the three months ended December 31, 2012, in order to derive the activity for the three months ended March 31, 2012 as shown in the column labeled "RAI" in the consolidating statement of cash flows that follows the table below (in thousands) (unaudited):
 
For the
Six Months Ended
March 31, 2012
 
For the
Three Months Ended
December 31, 2011
 
 
 
For the
Three Months Ended
March 31, 2012
 
As originally filed
 
As originally filed
 
Reclassifications
 
As presented
CASH FLOWS FROM OPERATING ACTIVITIES:
  
 
 
 
 
 
 
Net (loss) income
$
(1,784
)
 
$
563

 
$
—

 
$
(2,347
)
Adjustments to reconcile net (loss) income to net cash used in operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
3,693

 
3,087

 
—

 
606

Other-than-temporary impairment on investment securities
74

 
—

 
—

 
74

Provision for credit losses
5,212

 
2,250

 
—

 
2,962

Equity in (earnings) losses of unconsolidated entities
(228
)
 
(557
)
 
—

 
329

Distributions from unconsolidated entities
2,021

 
1,163

 
—

 
858

Loss on extinguishment of debt
2,190

 
2,190

 
—

 
—

Gain on sale of loans and investment securities, net
(63
)
 
(58
)
 
—

 
(5
)
Gain on sale of leases and loans
(37
)
 
(37
)
 
—

 
—

Gain on sale and deconsolidation of subsidiaries
(8,749
)
 
(8,749
)
 
—

 
—

Deferred income tax (benefit) provision
(1,169
)
 
154

 
—

 
(1,323
)
Equity-based compensation issued
817

 
498

 
—

 
319

Equity-based compensation received
(164
)
 
—

 
—

 
(164
)
Loss from discontinued operations
36

 
—

 
(20
)
 
16

Changes in operating assets and liabilities
(4,296
)
 
(1,412
)
 
20

 
(2,864
)
Net cash used in operating activities
(2,447
)
 
(908
)
 
—

 
(1,539
)
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
  
 
 
 
 
 
 
Capital expenditures
(95
)
 
(106
)
 
—

 
11

Payments received on real estate loans and real estate
1,550

 
1,550

 
—

 
—

Investments in unconsolidated real estate entities
(503
)
 
(127
)
 
—

 
(376
)
Purchase of commercial finance assets
(18,483
)
 
(18,483
)
 
—

 
—

Principal payments received on leases and loans
9,037

 
9,031

 
—

 
6

Cash divested on deconsolidation of LEAF
(2,284
)
 
(2,284
)
 
—

 
—

Purchase of loans and investments
(736
)
 
(600
)
 
—

 
(136
)
Proceeds from sale of loans and investment securities
277

 
207

 
—

 
70

Net cash used in investing activities
(11,237
)
 
(10,812
)
 
—

 
(425
)
 
 
 
 
 
 
 
 

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


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the
Six Months Ended
March 31, 2012
 
For the
Three Months Ended
December 31, 2011
 
 
 
For the
Three Months Ended
March 31, 2012
 
As originally filed
 
As originally filed
 
Reclassifications
 
As presented
CASH FLOWS FROM FINANCING ACTIVITIES:
  
 
 
 
 
 
 
Increase in borrowings
128,845

 
128,845

 
—

 
—

Principal payments on borrowings
(123,924
)
 
(123,823
)
 
—

 
(101
)
Preferred stock dividends paid by LEAF to RSO
(188
)
 
(188
)
 
—

 
—

Dividends paid
(1,135
)
 
(569
)
 
—

 
(566
)
Repurchase of common stock
(955
)
 
(939
)
 
—

 
(16
)
Decrease in restricted cash
(652
)
 
(633
)
 
19

 
—

Other financing activities
(2,275
)
 
(2,250
)
 
(19
)
 
(44
)
Net cash (used in) provided by financing activities
(284
)
 
443

 
—

 
(727
)
 
 
 
 
 
 
 
 
CASH FLOWS FROM DISCONTINUED OPERATIONS:
  
 
 
 
 
 
 
Operating activities
(569
)
 
(375
)
 
—

 
(194
)
Net cash used in discontinued operations
(569
)
 
(375
)
 
—

 
(194
)
 
 
 
 
 
 
 
 
Decrease in cash
(14,537
)
 
(11,652
)
 
—

 
(2,885
)
Cash, beginning of period
24,455

 
24,455

 
—

 
12,803

Cash, end of period
$
9,918

 
$
12,803

 
$
—

 
$
9,918



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




The following sets forth the effect of the restatement on the applicable line items in the Company's consolidated statement of cash flows for the three months ended March 31, 2012 (in thousands) (unaudited):
 
RAI
 
RSO
 
Eliminations
 
As Restated
CASH FLOWS FROM OPERATING ACTIVITIES:
  
 
 
 
 
 
 
Net (loss) income
$
(2,347
)
 
$
14,481

 
$
(525
)
 
$
11,609

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
606

 
—

 
—

 
606

Other-than-temporary impairment on investments
74

 
—

 
—

 
74

Provision for credit losses
2,962

 
—

 
—

 
2,962

Equity in earnings of unconsolidated entities
329

 
—

 
—

 
329

Distributions from unconsolidated entities
858

 
—

 
—

 
858

Gain on sale of loans and investment securities, net
(5
)
 
—

 
—

 
(5
)
Deferred income tax benefit
(1,323
)
 
—

 
—

 
(1,323
)
Equity-based compensation issued
319

 
165

 
(165
)
 
319

Equity-based compensation received
(164
)
 
 
 
164

 
—

Loss from discontinued operations
16

 
—

 
—

 
16

Changes in operating assets and liabilities
(2,864
)
 
—

 
—

 
(2,864
)
Change in cash attributable to operations of consolidated VIE - RSO
—

 
(14,110
)
 
1

 
(14,109
)
Net cash (used in) provided by operating activities
(1,539
)
 
536

 
(525
)
 
(1,528
)
 
 
 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
  
 
 
 
 
 
 
Capital expenditures
11

 
—

 
—

 
11

Investments in unconsolidated real estate entities
(376
)
 
—

 
—

 
(376
)
Principal payments received on leases and loans
6

 
—

 
—

 
6

Purchase of loans and securities by consolidated VIE - RSO
—

 
(167,505
)
 
—

 
(167,505
)
Principal payments and proceeds from sales received by consolidated VIE - RSO
—

 
162,632

 
—

 
162,632

Purchase of loans and investments
(136
)
 
—

 
—

 
(136
)
Proceeds from sale of loans and investment securities
70

 
—

 
—

 
70

Increase in restricted cash - consolidated VIE RSO
—

 
9,196

 
—

 
9,196

Other - consolidated VIE - RSO
—

 
1,081

 
20

 
1,101

Net cash (used in) provided by investing activities
(425
)
 
5,404

 
20

 
4,999

 
 
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
  
 
 
 
 
 
 
Principal payments on borrowings
(101
)
 
—

 
—

 
(101
)
Net repayments of debt by consolidated VIE - RSO
—

 
(9,537
)
 
—

 
(9,537
)
Dividends paid
(566
)
 
—

 
—

 
(566
)
Dividends paid on common stock by consolidated VIE - RSO
—

 
(19,979
)
 
505

 
(19,474
)
Net proceeds from issuance of common stock by consolidated VIE - RSO
—

 
24,158

 
—

 
24,158

Repurchase of common stock
(16
)
 
—

 
—

 
(16
)
Other financing activities
(44
)
 
—

 
—

 
(44
)
Other financing activities of consolidated VIE - RSO
—

 
(582
)
 
—

 
(582
)
Net cash used in financing activities
(727
)
 
(5,940
)
 
505

 
(6,162
)
 
 
 
 
 
 
 
 
CASH FLOWS FROM DISCONTINUED OPERATIONS:
  
 
 
 
 
 
 
Operating activities
(194
)
 
—

 
—

 
(194
)
Net cash used in discontinued operations
(194
)
 
—

 
—

 
(194
)
 
 
 
 
 
 
 
 
Decrease in cash
(2,885
)
 
—

 
—

 
(2,885
)
Cash, beginning of year
12,803

 
—

 
—

 
12,803

Cash, end of period
$
9,918

 
$
—

 
$
—

 
$
9,918

    

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


NOTE 3 - 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 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 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.
The financial statements for March 31, 2013 and 2012 reflect the consolidation of RSO. 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. See Note 18 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.
Recent Accounting Standards
Newly-Adopted Accounting Principles
The Company’s adoption of the following standard during 2013 did not have a material impact on its consolidated financial position, results of operations or cash flows:
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 adopted this guidance beginning January 1, 2013 and has presented the required disclosures.
Accounting Standard Issued But Not Yet Effective
The FASB issued the following accounting standard which was not yet effective for the Company as of March 31, 2013:
In July 2013, the FASB issued guidance that addresses the diversity in practice regarding financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires an unrecognized tax benefit, or a portion of, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent the deferred tax asset is not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with the deferred tax asset. The amendments in this standard are effective for the Company beginning January 1, 2014. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.


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


NOTE 4 – SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information (in thousands):
 
Three Months Ended
 
March 31,
 
2013
 
2012
Cash (paid) received:
(Restated)
 
(Restated)
Interest
$
(441
)
 
$
(585
)
Income tax payments
(863
)
 
(807
)
Refund of income taxes
13

 
—

 
 
 
 
Dividends declared per common share
$
0.03

 
$
0.03

 
 
 
 
Non-cash activities:
 

 
 

Repurchases of common stock from employees in exchange for the payment of income taxes and option exercises
$
28

 
$
93

Issuance of treasury stock for the Company's investment savings plan
109

 
212

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

 
135

NOTE 5 – 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):
(Restated)
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

 
2,245

 
20,432

Financial fund management entities
18

 
—

 
15

 
33

 
2,269

 
2,302

Other
21

 
—

 
—

 
21

 
100

 
121

 
1,179

 
679

 
56,270

 
58,128

 
4,707

 
62,835

Rent receivables - real estate
7

 
12

 
42

 
61

 
51

 
112

Total financing receivables
$
1,186

 
$
691

 
$
56,312

 
$
58,189

 
$
4,758

 
$
62,947

 
(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.  The remaining receivables from managed entities and related parties have no related allowance for credit losses.
    

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


The following table is the aging of the Company’s past due financing receivables (presented gross of allowance for credit losses) as of December 31, 2012 (in thousands):
(Restated)
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
$
—

 
$
—

 
$
40,112

 
$
40,112

 
$
118

 
$
40,230

Real estate investment entities
779

 
744

 
17,062

 
18,585

 
1,992

 
20,577

Financial fund management entities
6

 
—

 
47

 
53

 
2,140

 
2,193

Other
41

 
—

 
—

 
41

 
137

 
178

 
826

 
744

 
57,221

 
58,791

 
4,387

 
63,178

Rent receivables - real estate
4

 
10

 
58

 
72

 
40

 
112

Total financing receivables
$
830

 
$
754

 
$
57,279

 
$
58,863

 
$
4,427

 
$
63,290

 
(1)
Receivables are presented gross of an allowance for credit losses of $29.6 million, $2.5 million and $457,000 related to the Company’s commercial finance, real estate and financial fund management investment entities, respectively.  The remaining receivables from managed entities and related parties had no related allowance for credit losses.
The following table summarizes the activity in the allowance for credit losses for all financing receivables (in thousands):
(Restated)
Receivables
from Managed
Entities
 
Leases and Loans
 
Rent
Receivables
 
Total
Three Months Ended March 31, 2013:
 
 
 
 
 
 
 
Balance, beginning of year
$
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

 
 
 
 
 
 
 
 
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 year
$
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

 
 
 
 
 
 
 


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 RESTATED 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):
(Restated)
Receivables from
Managed Entities
 
Rent
Receivables
 
Total
Ending balance, individually evaluated for impairment
$
62,835

 
$
—

 
$
62,835

Ending balance, collectively evaluated for impairment
—

 
112

 
112

Balance, end of period
$
62,835

 
$
112

 
$
62,947

The Company’s financing receivables (presented gross of allowance for credit losses) as of December 31, 2012 relate to the balance in the allowance for credit losses, as follows (in thousands):
(Restated)
Receivables from
Managed Entities
 
Rent
Receivables
 
Total
Ending balance, individually evaluated for impairment
$
63,178

 
$
—

 
$
63,178

Ending balance, collectively evaluated for impairment
—

 
112

 
112

Balance, end of year
$
63,178

 
$
112

 
$
63,290

The following table discloses information about the Company’s impaired financing receivables (in thousands):
(Restated)
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 December 31, 2012
 
 
 
 
 
 
 
Financing receivables with a specific valuation allowance:
 

 
 

 
 

 
 

Receivables from managed entities – commercial finance
$
8,633

 
$
38,219

 
$
29,586

 
$
38,110

Receivables from managed entities – real estate
2,291

 
4,808

 
2,517

 
4,630

Receivable from managed entities - financial fund management
848

 
1,305

 
457

 
1,305

Rent receivables – real estate
—

 
68

 
68

 
40

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


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


NOTE 6 – INVESTMENTS IN REAL ESTATE
The Company’s investments in real estate, net, consist of the following (in thousands):
 
March 31,
2013
 
December 31,
2012
Properties owned, net of accumulated depreciation of $8,023 and $7,972:
 
 
 
Hotel property (Savannah, Georgia)
$
10,783

 
$
11,107

Office building (Philadelphia, Pennsylvania)
844

 
1,058

 
11,627

 
12,165

Partnerships and other investments
5,476

 
5,876

Total investments in real estate, net
$
17,103

 
$
18,041

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, is as follows (in thousands):
2014
$
858

2015
790

2016
545

2017
442

2018
373

Thereafter
414

 
$
3,422

NOTE 7 − INVESTMENT SECURITIES
Components of investment securities are as follows (in thousands):
(Restated)
March 31,
2013
 
December 31,
2012
Available-for-sale securities
$
6,025

 
$
5,211

Trading securities
3,796

 
5,365

Total investment securities, at fair value
$
9,821

 
$
10,576

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):
(Restated)
Cost or
Amortized Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
March 31, 2013:
 
CLO securities
$
4,781

 
$
1,097

 
$
(217
)
 
$
5,661

Equity securities
208

 
156

 
—

 
364

Total
$
4,989

 
$
1,253

 
$
(217
)
 
$
6,025

 
 
 
 
 
 
 
 
December 31, 2012:
 
CLO securities
$
3,712

 
$
1,290

 
$
—

 
$
5,002

Equity securities
109

 
100

 
—

 
209

Total
$
3,821

 
$
1,390

 
$
—

 
$
5,211

    

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


CLO securities.  The collateralized loan obligation ("CLO") securities represent the Company’s retained equity interests in seven and five CLO issuers that it directly and/or through its joint venture has structured and managed at March 31, 2013 and December 31, 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.
Equity securities.  The Company also holds 18,972 shares of The Bancorp, Inc. ("TBBK") (NASDAQ: 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 publicly traded investment entity that it sponsored and manages ("RREDX") (NASDAQ: RREDX), for $100,000.
Trading securities.  The Company began purchasing investment securities classified as trading securities during fiscal 2012. For the three months ended March 31, 2013, the Company had net realized gains from sales of trading securities of $517,000, as well as unrealized gains of $745,000 which were included in Financial Fund Management Revenues on the consolidated statements of operations and comprehensive 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:
 
 
 
 
 
 
 
 
 
 
 
CLO securities
$
949

 
$
(217
)
 
1

 
$
—

 
$
—

 
—

 Other-than-temporary impairment losses. During the three 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. 
NOTE 8 − 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
 
December 31,
2012
 
 
 
Real estate investment entities
1% – 10%
 
$
8,259

 
$
8,397

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

 
3,847

Trapeza entities
33% − 50%
 
956

 
912

Investments in unconsolidated entities
 
 
$
13,395

 
$
13,156

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.

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


Two of the structured finance entities that hold investments in trust preferred assets (“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. In the three months ended September 30, 2013, the general partner began the process of dissolving the two partnerships, and settled the clawback commitments.  The Company’s proportionate share of these payments was $1.1 million. The clawback liability was $1.2 million at December 31, 2012.
Included in investments in unconsolidated entities is the Company's $2.2 million investment in Resource Real Estate Opportunity REIT, Inc. (“RRE Opportunity REIT”). 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
 
March 31, 2013
Management fee revenues
$
8,248

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

Portion of net income attributable to the Company
$
582

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 CLOs 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 these 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 RESTATED 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):
(Restated)
March 31,
2013
 
December 31,
2012
Accounts payable and other accrued liabilities
$
9,007

 
$
8,773

SERP liability
6,629

 
6,806

Accrued wages and benefits
1,833

 
4,428

Trapeza clawback (see Note 16)
1,181

 
1,181

Real estate loan commitment
—

 
371

  Total accrued expenses and other liabilities
$
18,650

 
$
21,559

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
 
December 31, 2012
(Restated)
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

Mortgage debt
 

 
10,425

 
10,473

Other debt
 

 
321

 
567

Total borrowings
 

 
$
20,746

 
$
21,040

 
(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 December 31, 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.
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 months ended March 31, 2013 was $600,000 at weighted average borrowing rates of 3.2%, with an effective interest rate (inclusive of amortization of deferred issuance costs) of 27.9%. Weighted average borrowings on the line of credit for the three months ended March 31, 2012 were $5.3 million at a weighted average borrowing rate of 6.0%, with an effective interest of rate of 9.7%.

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


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 nine months ended March 31, 2013 and 2012 and the availability as of March 31, 2013 was $3.5 million. In November 2013, the Company amended the facility with Republic to extend the maturity until December 28, 2016 and to increase the unused fee to 0.50%.
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 were unaffected and, as of March 31, 2013, 3,444,607 remain outstanding. The Company had accounted for these warrants as a discount to the original notes. The effective interest rate for the three months ended March 31, 2013 and 2012 were 9.8% and 9.4%, respectively.
Per the agreement relating to the issuance of the Senior Notes, the Company was restricted from paying dividends in
excess of $0.03 per share. During the quarter ended September 2013, the holders of the Senior Notes consented to remove the
restriction in its entirety.
Debt repayments
Annual principal payments on the Company’s aggregate borrowings for the next five succeeding annual periods ending March 31, and thereafter, are as follows (in thousands) (restated):
2014
$
510

2015
10,201

2016
213

2017
229

2018
244

Thereafter
9,349

 
$
20,746

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 RESTATED CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


NOTE 11 – ACCUMULATED OTHER COMPREHENSIVE LOSS
Included in Accumulated Other Comprehensive Loss as of March 31, 2013 and December 31, 2012 are net unrealized losses of $0 and $4,000 (net of tax benefit of $2,000) 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 December 31, 2012, the Company had a net unrealized loss of $9,000 (net of tax benefit of $4,000) and $10,000 (net of tax benefit of $7,000), respectively, included in Accumulated Other Comprehensive Loss for the hedging activity of LEAF. Except for hedging activity related to RSO (see Note 18), 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):
(Restated)
Investment Securities
Available-for-Sale
 
Cash Flow
Hedges
 
SERP Pension
Liability
 
Total
Balance, December 31, 2012, net of tax of $544, $(10) and $(2,326)
$
846

 
$
(14
)
 
$
(3,029
)
 
$
(2,197
)
Other comprehensive (loss) income before reclassifications
(351
)
 
5

 
—

 
(346
)
Amounts reclassified from accumulated other comprehensive income (1)
131

 
—

 
87

 
218

Net current-period other comprehensive (loss) income
(220
)
 
5

 
87

 
(128
)
Balance, March 31, 2013, net of tax of ($410), $(4), and $(2,318)
$
626

 
$
(9
)
 
$
(2,942
)
 
$
(2,325
)
 
(1)
Amounts reclassified from accumulated other comprehensive income are included in the following line items on the consolidated statements of operations:
Investment securities available-for-sale - included in Other-than-temporary impairment on investments
Cash flow hedges - included in Revenues - commercial finance
SERP pension liability - included in General and administrative expenses
NOTE 12 – EARNINGS PER SHARE
Basic earnings 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
 
2012
Shares
 
 
 
Basic shares outstanding
20,124

 
19,437

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

 
—

Dilutive shares outstanding
21,815

 
19,437

For the three months ended March 31, 2012, the Basic EPS and Diluted EPS shares were the same because the impact of potential dilutive securities would have been antidilutive. Accordingly, the following were excluded from the Diluted EPS computation: outstanding options to purchase 1.0 million shares of common stock (at a weighted average price per share of $16.27) and warrants to purchase 3,690,000 shares of common shares (exercise price per share of $5.10).


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


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):
 
Three Months Ended
 
March 31,
(Restated)
2013
 
2012
Interest cost
$
60

 
$
85

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

 
130

Net benefit cost
$
136

 
$
198

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):
(Restated)
March 31,
2013
 
December 31,
2012
Receivables from managed entities and related parties, net:
 
 
 
Real estate investment entities
$
20,432

 
$
18,060

Commercial finance investment entities (1) 
7,531

 
10,644

Financial fund management investment entities
1,845

 
1,736

Other
121

 
178

Receivables from managed entities and related parties
$
29,929

 
$
30,618

 
 
 
 
Payables due to managed entities and related parties, net:
 

 
 

Real estate investment entities (2) 
$
2,829

 
$
3,300

Other
211

 
236

Payables to managed entities and related parties
$
3,040

 
$
3,536

 
(1)
Includes $32.4 million and $29.6 million of reserves, respectively, 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 $2.9 million and $2.5 million, respectively, 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 RESTATED CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2013
(unaudited)


The Company receives fees, dividends and reimbursed expenses from several related or 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,
(Restated)
2013
 
2012
Fees from unconsolidated investment entities:
 
 
 
Real estate (1) 
$
4,194

 
$
4,689

Financial fund management 
748

 
853

Commercial finance (2) 
—

 
—

CVC Credit Partners – reimbursement of costs and expenses
377

 
—

RRE Opportunity REIT:
 
 
 
Reimbursement of costs and expenses
204

 
530

Dividends paid
33

 
—

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

 
82

1845 Walnut Associates Ltd:
 
 
 
Payment for rent and related expenses
(157
)
 
(208
)
Property management fees
42

 
—

Brandywine Construction & Management, Inc. – payment for
    property management fees for the hotel property
(43
)
 
(39
)
Atlas Energy, L.P. – reimbursement of costs and expenses
141

 
149

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

 
29

9 Henmar, LLC – payment of broker/consulting fees 
(3
)
 
(4
)
 
(1)
Includes discounts recorded by the Company of $133,000 and $52,000 recorded in the three months ended March 31, 2013 and 2012, respectively, in connection with management fees from its real estate investment entities that are expected to be received in future periods.
(2)
During the three months ended March 31, 2013 and 2012, the Company waived $618,000 and $1.2 million, respectively, of fund management fees from its commercial finance investment entities.
Relationship with 1845 Walnut Associates, Ltd. The Company owns a 7% investment in a real estate partnership that owns a building at 1845 Walnut Street, Philadelphia in which the Company also leases office space. In October 2012, the Company signed a new ten-year lease which was amended in May 2013 and commenced in August 2013 for 34,476 square feet of office space. The Company was provided a tenant allowance of $1.5 million for renovation of the office and the lease provides for a five-year extension. In March 2013, the Company assumed the property management of the building.
Advances to Affiliated Real Estate Limited Partnership. During fiscal 2012, the Company agreed to advance up to $3.0 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 $2.6 million as of March 31, 2013 and December 31, 2012, respectively, and are included in Receivables from managed entities and related parties. The Company recorded $18,000 and $16,000 of interest income on this loan during the three months ended March 31, 2013 and 2012, respectively.



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


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 the historical trends of the funds (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.
Investment securities − equity securities. The Company uses quoted market prices (Level 1) to value its investments in 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).

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


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 2012 (Level 2). The property was 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 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, initially 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): 
(Restated)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Investment securities
$
364

 
$
—

 
$
9,457

 
$
9,821

As of December 31, 2012, the fair values of the Company’s assets recorded at fair value on a recurring basis were as follows (in thousands): 
(Restated)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Investment securities
$
209

 
$
—

 
$
10,367

 
$
10,576


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


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 three months ended March 31, 2013 (in thousands):
(Restated)
Investment Securities
Balance, beginning of year
$
10,367

Purchases
3,404

Income accreted
227

Payments and distributions received
(2,719
)
Impairment recognized in earnings
(214
)
Sales
(2,460
)
Gain on sales of trading securities
517

Unrealized holding gain on trading securities
745

Change in unrealized losses included in accumulated other comprehensive loss
(410
)
Balance, end of period
$
9,457

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, 2012 have not been provided.


RESOURCE AMERICA, INC.
NOTES TO RESTATED 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
Three Months Ended March 31, 2013:
 
 
 
 
 
 
 
Asset:
 
 
 
 
 
 
 
Receivables from managed entities – commercial finance, real estate and financial fund management
$
—

 
$
—

 
$
7,313

 
$
7,313

Liability:
 

 
 

 
 

 
 

Apidos contractual commitment
$
—

 
$
—

 
$
994

 
$
994

 
 
 
 
 
 
 
 
Year Ended December 31, 2012:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Receivables from managed entities – commercial finance and real estate
$
—

 
$
—

 
$
14,506

 
$
14,506

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

Total
$
—

 
$
727

 
$
50,804

 
$
51,531

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
 
December 31, 2012
(Restated)
Carrying Amount
 
Estimated Fair Value
 
Carrying Amount
 
Estimated Fair Value
Assets:
 
 
 
 
 
 
 
Receivables from managed entities
$
29,929

 
$
29,929

 
30,618

 
30,618

 
$
29,929

 
$
29,929

 
$
30,618

 
$
30,618

Borrowings:
 

 
 

 
 

 
 

Real estate debt
$
10,425

 
$
11,616

 
$
10,473

 
$
11,398

Senior Notes
10,000

 
12,066

 
10,000

 
11,728

Other debt
321

 
321

 
567

 
567

 
$
20,746

 
$
24,003

 
$
21,040

 
$
23,693

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 rates for similar loans at March 31, 2013 and December 31, 2012.


RESOURCE AMERICA, INC.
NOTES TO RESTATED 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 after 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 has no current 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) as of March 31, 2013. 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 $113,000 as of March 31, 2013 and December 31, 2012, respectively.  As of March 31, 2013 and December 31, 2012, Resource Securities net capital was $623,000 and $258,000, respectively, which exceeded the minimum requirements by $498,000 and $145,000, 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 December 31, 2012. Subsequently in the three months ended September 2013, the general partner began the process of dissolving the two partnerships, and settled the clawback commitments.  The Company’s proportionate share of these payments was $1.1 million.
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 $20.0 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 appealed and the appellate court affirmed the dismissal as against Trapeza in August 2013.
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 RESTATED 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 June 2013, the Company funded the remaining amount.
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. In August 2013, the Company funded the remaining $250,000.
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 manages its operations and makes business decisions based on three reportable operating segments, Real Estate, Financial Fund Management and Commercial Finance, and one segment, RSO, which is a consolidated VIE.  Certain other activities are reported in the “All Other” category and Eliminations ("Elims") in the tables in order for the information presented about the Company's operating segments to agree to the consolidated balance sheets and statements of operations. Summarized operating segment data are as follows (in thousands):
(Restated)
Real Estate
 
Financial Fund Management
 
Commercial Finance
 
All Other (1)
 
Subtotal
 
RSO
 
Elims
 
Total
Three Months Ended March 31, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
11,320

 
$
2,868

 
$
—

 
$
—

 
$
14,188

 
$
30,578

 
$
(2,700
)
 
$
42,066

Equity in earnings (losses) of unconsolidated entities
20

 
1,419

 
(178
)
 
—

 
1,261

 
—

 
—

 
1,261

Total revenues
11,340

 
4,287

 
(178
)
 
—

 
15,449

 
30,578

 
(2,700
)
 
43,327

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

 
(12,013
)
 
(16,188
)
 
2,654

 
(25,547
)
General and administrative expenses
(1,404
)
 
9

 
—

 
(758
)
 
(2,153
)
 
—

 
—

 
(2,153
)
Provision for credit losses
2,522

 
—

 
(2,860
)
 
—

 
(338
)
 
—

 
—

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

 
(166
)
 
(416
)
 
—

 
—

 
(416
)
Interest expense
(197
)
 
—

 
(1
)
 
(296
)
 
(494
)
 
—

 
—

 
(494
)
Other-than-temporary impairment on investments
—

 
(214
)
 
—

 
—

 
(214
)
 
—

 
—

 
(214
)
Other income (expense), net
297

 
589

 
6

 
(147
)
 
745

 
—

 
(525
)
 
220

Pretax loss (income) attributable to noncontrolling interests (2)
43

 
—

 
—

 
—

 
43

 
(12,314
)
 
—

 
(12,271
)
Income (loss) from continuing operations excluding noncontrolling
interests before taxes
$
2,931

 
$
2,123

 
$
(3,078
)
 
$
(1,367
)
 
$
609

 
$
2,076

 
$
(571
)
 
$
2,114




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



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

 
$
5,428

 
$
—

 
$
—

 
$
15,109

 
$
28,726

 
$
(3,510
)
 
$
40,325

Equity in earnings (losses) of unconsolidated entities
35

 
876

 
(1,240
)
 
—

 
(329
)
 
—

 
—

 
(329
)
Total revenues
9,716

 
6,304

 
(1,240
)
 
—

 
14,780

 
28,726

 
(3,510
)
 
39,996

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

 
(12,016
)
 
(11,630
)
 
3,457

 
(20,189
)
Restructuring expense
—

 
—

 
—

 
(365
)
 
(365
)
 
—

 
—

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

 
(1,769
)
 
(2,467
)
 
—

 
—

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

 
(2,859
)
 
—

 
(2,962
)
 
—

 
—

 
(2,962
)
Impairment charges
—

 
(74
)
 
—

 
—

 
(74
)
 
—

 
—

 
(74
)
Depreciation and amortization
(324
)
 
(37
)
 
—

 
(174
)
 
(535
)
 
—

 
—

 
(535
)
Interest expense
(213
)
 
—

 
(36
)
 
(396
)
 
(645
)
 
—

 
—

 
(645
)
Other income (expense), net
129

 
538

 
—

 
(37
)
 
630

 
—

 
(472
)
 
158

Pretax loss (income) attributable to noncontrolling interests (2)
39

 
—

 
—

 
—

 
39

 
(14,030
)
 
—

 
(13,991
)
Income (loss) from continuing operations excluding noncontrolling
interests before taxes
$
1,743

 
$
1,748

 
$
(4,365
)
 
$
(2,741
)
 
$
(3,615
)
 
$
3,066

 
$
(525
)
 
$
(1,074
)


(Restated)
Real Estate
 
Financial Fund Management
 
Commercial Finance
 
All 
Other (1)
 
Subtotal
 
RSO
 
Elims
 
Total
Segment assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2013
$
171,843

 
$
77,621

 
$
8,507

 
$
(68,444
)
 
$
189,527

 
$
2,368,563

 
(29,312
)
 
$
2,528,778

March 31, 2012
164,897

 
30,685

 
26,407

 
(53,497
)
 
168,492

 
2,307,023

 
(25,747
)
 
2,449,768

 
(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 income (loss) from operations as computed in accordance with U.S. GAAP and should be deducted to compute income (loss) from operations as reflected in the Company’s consolidated statements of operations.


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


NOTE 18 − VARIABLE INTEREST ENTITIES
In general, a VIE is an entity that does not have sufficient equity to finance its operations without additional subordinated financial support, or an entity for which the risks and rewards of ownership are not directly linked to voting interests. 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 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.
VIEs not consolidated
The Company’s investments in the 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.  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
RRE Opportunity REIT
$
—

 
$
2,242

 
$
2,242

Trapeza entities
—

 
956

 
956

Ischus entities
184

 
—

 
184

 
$
184

 
$
3,198

 
$
3,382

 
(1)
Exclusive of expense reimbursements due to the Company.
Consolidated VIE - RSO
The Company determined that it was the primary beneficiary of RSO, as it has the power to direct the activities of RSO that most significantly impact RSO’s economic performance, and the obligation to absorb losses/right to receive benefits from RSO that could potentially be significant to RSO. As part of its analysis the Company evaluated its duties under the terms of the management agreement and the voting rights provided to RSO’s shareholders which include the right to elect the Company’s board of directors and the ability to terminate the management agreement. The Company concluded that the fee paid to the manager in the event of a termination and the Company’s role in managing the operations of RSO resulted in the Company having the power to direct, as defined in FASB ASC Topic 810. Additionally, the Company prepared a quantitative analysis to measure the management/incentive fees and the Company’s equity ownership position in RSO relative to the anticipated economic performance of RSO. The Company determined its benefits could be significant and therefore concluded that the Company is the primary beneficiary and should consolidate RSO. The assets of RSO are held solely to satisfy RSO’s obligations and the creditors of RSO have no recourse against the assets of the Company.



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


The following reflects the detail of the assets and liabilities and operations of RSO, which the Company consolidated and included in its consolidated balance sheets and statements of operations.
RSO Balance Sheet detail (in thousands):
 
March 31, 2013
 
December 31, 2012
 
(Unaudited)
 
 
ASSETS (1)
 
 
 
Cash and cash equivalents
$
67,661

 
$
85,278

Restricted cash
112,131

 
94,112

Subtotal- Cash and cash equivalents
179,792

 
179,390

 
 
 
 
Investment securities, trading
32,892

 
24,843

Investment securities available-for-sale, pledged as collateral, at fair value
192,673

 
195,200

Investment securities available-for-sale, at fair value
49,609

 
36,390

Subtotal- Investments, at fair value
275,174

 
256,433

 
 
 
 
Loans held for sale
18,150

 
48,894

Loans, pledged as collateral and net of allowances of $17.0 million and $17.7 million
1,708,540

 
1,793,780

Loans receivable–related party
7,860

 
8,324

Subtotal - Loans before eliminations
1,734,550

 
1,850,998

Eliminations
(1,570
)
 
(1,570
)
Subtotal - Loans
1,732,980

 
1,849,428

 
 
 
 
Investment in real estate
75,142

 
75,386

Investments in unconsolidated entities
48,419

 
45,413

Subtotal - Investments in real estate and unconsolidated entities before eliminations
123,561

 
120,799

Eliminations
(108
)
 
(93
)
Subtotal - Investments in real estate and unconsolidated entities
123,453

 
120,706

 
 
 
 
Linked transactions, net at fair value
22,455

 
6,835

Interest receivable
8,913

 
7,763

Deferred tax asset
2,887

 
2,766

Principal paydown receivable
20

 
25,570

Intangible assets
12,660

 
13,192

Prepaid expenses
3,839

 
10,396

Other assets
4,712

 
4,109

Subtotal - Other assets before eliminations
$
55,486

 
$
70,631

Eliminations
(32
)
 
(31
)
Subtotal - Other assets
$
55,454

 
$
70,600

 
 
 
 
Total assets - before eliminations
$
2,368,563

 
$
2,478,251

Total assets - after eliminations
$
2,366,853

 
$
2,476,557

LIABILITIES (2)


 
 

Borrowings
$
1,649,840

 
$
1,785,600

 
 
 
 
Distribution payable
22,731

 
21,655

Accrued interest expense
3,096

 
2,918

Derivatives, at fair value
14,036

 
14,687

Accrued tax liability
1,859

 
13,641

Deferred tax liability
8,376

 
8,376

Accounts payable and other liabilities
10,877

 
18,029

Subtotal - other liabilities before eliminations
60,975

 
79,306

Eliminations
(2,311
)
 
(8,067
)
Subtotal - Other liabilities
58,664

 
71,239

Total liabilities - before eliminations
$
1,710,815

 
$
1,864,906

Total liabilities - after eliminations
$
1,708,504

 
$
1,856,839


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


The following table presents the details of noncontrolling interests attributable to RSO (in thousands):
 
March 31,
2013
 
December 31,
2012
 
(Unaudited)
 
 
Total stockholders' equity per RSO balance sheet
$
657,748

 
$
613,345

Eliminations
(31,432
)
 
(31,022
)
Noncontrolling interests attributable to RSO
$
626,316

 
$
582,323


RSO Balance Sheet detail (in thousands):
 
March 31,
2013
 
December 31,
2012
 
(Unaudited)
 
 
(1) Assets of consolidated VIEs of RSO included in the total assets above:
 
 
 
        Restricted cash
$
107,620

 
$
90,108

        Investments securities available-for-sale, pledged as collateral, at fair value
137,553

 
135,566

        Loans held for sale
18,150

 
14,894

        Loans, pledged as collateral and net of allowances of $13.3 million
           and $15.2 million
1,533,796

 
1,678,719

        Interest receivable
6,527

 
5,986

        Prepaid expenses
303

 
328

        Principal receivable
21

 
25,570

        Other assets
—

 
333

        Total assets of consolidated RSO VIEs
$
1,803,970

 
$
1,951,504

 
 
 
 
(2) Liabilities of consolidated VIEs of RSO included in the total liabilities above:
 
 
 
        Borrowings
$
1,475,014

 
$
1,614,882

        Accrued interest expense
2,528

 
2,666

        Derivatives, at fair value
13,478

 
14,078

        Accounts payable and other liabilities
1,423

 
698

        Total liabilities of consolidated RSO VIEs
$
1,492,443

 
$
1,632,324



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


RSO Income Statement Detail
(in thousands)
 
Three Months Ended
 
March 31,
 
2013
 
2012
 
(Unaudited)
 
(Unaudited)
REVENUES
 
 
 
Interest income:
 
 
 
Loans
$
27,812

 
$
23,615

Securities
3,642

 
3,405

Interest income − other
1,866

 
2,829

Total interest income
33,320

 
29,849

Interest expense
11,165

 
8,383

Net interest income
22,155

 
21,466

Rental income
6,174

 
1,919

Dividend income
16

 
17

Equity in losses of unconsolidated subsidiaries
(425
)
 
1,071

Fee income
1,410

 
1,610

Net realized and unrealized gain on sales of investment securities
available-for-sale and loans
391

 
380

Net realized and unrealized (loss) gain on investment securities, trading
1,116

 
2,144

Unrealized gain (loss) and net interest income on linked transactions, net
(259
)
 
119

Revenues from consolidated VIE - RSO
30,578

 
28,726

OPERATING EXPENSES
 

 
 

Management fees − related party
2,978

 
3,443

Equity compensation − related party
3,591

 
868

Professional services
1,446

 
1,100

Insurance
162

 
158

Rental operating expense
3,937

 
1,320

General and administrative
1,873

 
1,063

Depreciation and amortization
1,138

 
1,361

Income tax expense
1,762

 
2,615

Net impairment losses recognized in earnings
21

 
139

Provision for loan losses
1,042

 
2,178

Total operating expenses
17,950

 
14,245

Reclassification of income tax provision
(1,762
)
 
(2,615
)
Expenses from consolidated VIE -RSO
16,188

 
11,630

Adjusted operating income
14,390

 
17,096

OTHER REVENUE (EXPENSE)
 

 
 

Income from continuing operations
14,390

 
17,096

Income tax provision - RSO
1,762

 
2,615

NET INCOME
12,628

 
14,481

Net income allocated to preferred shares
(1,311
)
 
—

Net income allocated to noncontrolling interests
209

 
—

NET INCOME ALLOCABLE TO RSO COMMON SHARES
$
11,526

 
$
14,481




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


RSO Summarized Cash Flow Detail
(in thousands)
 
Three Months Ended
 
March 31,
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
(Unaudited)
 
(Unaudited)
Net income
$
12,628

 
$
14,481

Line items included in "Change in cash attributable to consolidated VIE - RSO":
 
 
 
Provision for loan losses
1,042

 
2,178

Depreciation of investments in real estate and other
666

 
380

Amortization of intangible assets
532

 
982

Amortization of term facilities
221

 
140

Accretion of net discounts on loans held for investment
(4,079
)
 
(5,519
)
Accretion of net discounts on securities available-for-sale
(731
)
 
(861
)
Amortization of discount on notes of CDOs
876

 
308

Amortization of debt issuance costs on notes of CDOs
1,176

 
927

Amortization of stock-based compensation
3,591

 
868

Amortization of terminated derivative instruments
55

 
56

Distribution to subordinated debt holder
670

 
1,584

Accretion of interest-only available-for-sales securities
(247
)
 
—

Deferred income tax benefit
(115
)
 
—

Purchase of securities, trading
(10,044
)
 
(8,348
)
Principal payments on securities, trading
21

 
833

Proceeds from sales of securities, trading
3,089

 
5,025

Net realized and unrealized gains on investment securities, trading
(1,116
)
 
(2,144
)
Net realized gain on sales of investment securities available-for-sale and loans
(391
)
 
(380
)
Net impairment losses recognized in earnings
12

 
139

Linked transactions fair value adjustments
592

 
—

Equity in losses (earnings) of unconsolidated subsidiaries
425

 
(1,071
)
Changes in operating assets and liabilities
14,426

 
(14,761
)
Subtotal - net cash provided by operating activities
10,671

 
(19,664
)
Change in consolidated VIE - RSO cash for the period
17,617

 
5,554

Subtotal - Change in cash attributable to operations of consolidated VIE - RSO before eliminations
28,288

 
(14,110
)
Elimination of intercompany activity
(654
)
 
1

Subtotal - Change in cash attributable to operations of consolidated VIE - RSO
27,634

 
(14,109
)
 
 
 
 
Non-cash incentive compensation to RAI
(1
)
 
165

Elimination of intercompany activity
1

 
(165
)
Non-cash incentive compensation to RAI - after eliminations
—

 
—

 
 
 
 
Net cash provided by (used in) operating activities (excluding eliminations)
23,298

 
(5,018
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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


 
Three Months Ended
 
March 31,
 
2013
 
2012
CASH FLOWS FROM INVESTING ACTIVITIES:
(Unaudited)
 
(Unaudited)
Purchase of loans
(146,699
)
 
(150,845
)
Purchase of securities available-for-sale
(63,292
)
 
(16,660
)
Subtotal - purchase of loans and investment securities by consolidated VIE - RSO
(209,991
)
 
(167,505
)
Proceeds from sale of loans
58,148

 
40,120

Principal payments received on loans
209,107

 
116,848

Principal payments on securities available-for-sale
7,944

 
5,595

Principal payments received on loans – related parties
464

 
69

Subtotal - principal payments and proceeds from sale of loans and securities by consolidated VIE - RSO
275,663

 
162,632

Decrease in restricted cash
(19,241
)
 
9,196

Lines included in "Other - consolidated VIE - RSO":
 
 
 
Investment in unconsolidated entity
(4,431
)
 
934

Improvements in real estate held-for-sale
—

 
(138
)
Proceeds from sale of real estate held-for-sale
—

 
907

Distributions from investments in real estate
253

 
448

Improvements in investments in real estate
(321
)
 
(348
)
Purchase of furniture and fixtures
—

 
(722
)
Subtotal - other investing activities of consolidated VIE - RSO, before eliminations
(4,499
)
 
1,081

Eliminations
—

 
20

Subtotal - other investing activities of consolidated VIE
(4,499
)
 
1,101

Net cash provided by investing activities (excluding eliminations)
41,932

 
5,404

 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Items included in "Net borrowings (repayments) of debt by consolidated VIE - RSO":
 
 
 
Proceeds from borrowings:
 
 
 

   Repurchase agreements
37,145

 
8,948

Payments on borrowings:
 
 
 

   Collateralized debt obligations
(141,341
)
 
(18,485
)
Net repayments of debt by consolidated VIE - RSO
(104,196
)
 
(9,537
)
Distributions paid on common stock
(20,978
)
 
(19,979
)
Elimination of RAI dividends received
556

 
505

Distributions paid on RSO common stock, after eliminations
(20,422
)
 
(19,474
)
Items included in "Net proceeds from issuance of stock by consolidated VIE - RSO":
 
 
 
Net proceeds from dividend reinvestment and stock purchase plan (net of offering costs of $0 and $19)
17,995

 
24,158

Proceeds from issuance of 8.25% Series B redeemable
preferred shares (net of offering costs of $707 and $0)
26,867

 
—

Subtotal - Net proceeds from issuance of stock by consolidated VIE - RSO
44,862

 
24,158

Items included in "Other - consolidated VIE - RSO":
 
 
 
Payment of debt issuance costs
(140
)
 
(582
)
Payment of equity to third party sub-note holders
(1,461
)
 
—

Distributions paid on preferred stock
(934
)
 
—

Subtotal - Other consolidated VIE - RSO financing activity
(2,535
)
 
(582
)
Net cash used in financing activities (excluding eliminations)
$
(82,847
)
 
$
(5,940
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
(17,617
)
 
(5,554
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
85,278

 
43,116

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
67,661

 
$
37,562

SUPPLEMENTAL DISCLOSURE:
 
 
 
Interest expense paid in cash
$
10,188

 
$
8,401


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


A. RSO SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment Securities
RSO classifies its investment portfolio as trading or available-for-sale.  RSO, from time to time, may sell any of its investments due to changes in market conditions or in accordance with its investment strategy.
RSO’s investment securities, trading are reported at fair value.  To determine fair value, RSO's management uses a dealer quote, which typically will be the dealer who sold RSO the security.  RSO has been advised that, in formulating their quotes, dealers may use recent trades in the particular security, if any, market activity in similar securities, if any, or internal valuation models.  These quotes are non-binding.  Based on how dealers develop their quotes, market liquidity and levels of trading, RSO categorizes these investments as either Level 2 or Level 3 in the fair value hierarchy.  RSO evaluates the reasonableness of the quotes it receives by applying its own valuation models.  If there is a material difference between a quote RSO receives and the value indicated by its valuation models, RSO will evaluate the difference.  As part of that evaluation, RSO will discuss the difference with the dealer, who may revise its quote based upon these discussions.  Alternatively, RSO may revise its valuation models.
RSO’s investment securities available-for-sale are reported at fair value.  To determine fair value, RSO uses an independent third-party valuation firm utilizing market color as well as appropriate prepayment, default, and recovery rates.  These valuations are validated utilizing dealer quotes or bids. If there is a material difference between the value indicated by the third-party valuation firm and the dealer quote or bid, RSO will evaluate the difference which could result in an updated valuation from the third party or a revised dealer quote. Based on the market color available for each position, RSO categorizes these investments as either Level 2 or Level 3 in the fair value hierarchy.
On a quarterly basis, RSO evaluates its available-for-sale investments for other-than-temporary impairment.  An available-for-sale investment is impaired when its fair value has declined below its amortized cost basis.  An impairment is considered other-than-temporary when the amortized cost basis of the investment or some portion thereof will not be recovered.  In addition, RSO’s intent to sell as well as the likelihood that RSO will be required to sell the security before the recovery of the amortized cost basis is considered.  Where credit quality is believed to be the cause of the other-than-temporary impairment, that component of the impairment is recognized as an impairment loss in the statement of operations.  Where other market components are believed to be the cause of the impairment, that component of the impairment is recognized as other comprehensive loss.
Investment security transactions are recorded on the trade date.  Realized gains and losses on investment securities are determined on the specific identification method.
Investment Interest Income Recognition
Interest income on RSO’s mortgage-backed and other asset-backed securities is accrued using the effective yield method based on the actual coupon rate and the outstanding principal amount of the underlying mortgages or other assets.  Premiums and discounts are amortized or accreted into interest income over the lives of the securities also using the effective yield method, adjusted for the effects of estimated prepayments.  For an investment purchased at par, the effective yield is the contractual interest rate on the investment.  If the investment is purchased at a discount or at a premium, the effective yield is computed based on the contractual interest rate increased for the accretion of a purchase discount or decreased for the amortization of a purchase premium.  The effective yield method requires RSO to make estimates of future prepayment rates for its investments that can be contractually prepaid before their contractual maturity date so that the purchase discount can be accreted, or the purchase premium can be amortized, over the estimated remaining life of the investment.  The prepayment estimates that RSO uses directly impact the estimated remaining lives of its investments.  Actual prepayment estimates are reviewed as of each quarter end or more frequently if RSO becomes aware of any material information that would lead it to believe that an adjustment is necessary.  If prepayment estimates are incorrect, the amortization or accretion of premiums and discounts may have to be adjusted, which would have an impact on future income.
Allowance for Loan Loss
RSO maintains an allowance for loan loss.  Loans held for investment are first individually evaluated for impairment so specific reserves can be applied.  Loans for which a specific reserve is not applicable are then evaluated for impairment as a homogeneous pool of loans with substantially similar characteristics so that a general reserve can be established, if needed.  The reviews are performed at least quarterly.

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



RSO considers a loan to be impaired if one of two conditions exists.  The first condition is if, based on current information and events, management believes it is probable that RSO will be unable to collect all amounts due according to the contractual terms of the loan agreement.  The second condition is if the loan is deemed to be a troubled-debt restructuring (“TDR”) where a concession has been given to a borrower in financial difficulty.  These TDRs may not have an associated specific loan loss allowance if the principal and interest amount is considered recoverable based on current market conditions, expected collateral performance and / or guarantees made by the borrowers.
When a loan is impaired under either of these two conditions, the allowance for loan losses is increased by the amount of the excess of the amortized cost basis of the loan over its fair value.  Fair value may be determined based on the present value of estimated cash flows; on market price, if available; or on the fair value of the collateral less estimated disposition costs.  When a loan, or a portion thereof, is considered uncollectible and pursuit of collection is not warranted, RSO will record a charge-off or write-down of the loan against the allowance for loan losses.
An impaired loan may remain on accrual status during the period in which RSO is pursuing repayment of the loan; however, the loan would be placed on non-accrual status at such time as (i) management believes that scheduled debt service payments will not be met within the coming 12 months; (ii) the loan becomes 90 days delinquent; (iii) management determines the borrower is incapable of, or has ceased efforts toward, curing the cause of the impairment; or (iv) the net realizable value of the loan’s underlying collateral approximates RSO’s carrying value for such loan.  While on non-accrual status, RSO recognizes interest income only when an actual payment is received.
Investments in Real Estate
Investments in real estate are carried net of accumulated depreciation.  Costs directly related to the acquisition are expensed as incurred.  Ordinary repairs and maintenance which are not reimbursed by the tenants are expensed as incurred.  Costs related to the improvement of the real property are capitalized and depreciated over their useful lives.
Acquisitions of real estate assets and any related intangible assets are recorded initially at fair value under FASB ASC Topic 805, “Business Combinations.”  RSO allocates the purchase price of its investments in real estate to land, building, site improvements, the value of in-place leases and the value of above or below market leases. The value allocated to above or below market leases is amortized over the remaining lease term as an adjustment to rental income. RSO amortizes the value allocated to in-place leases over the weighted average remaining lease term to depreciation and amortization expense.  RSO depreciates real property using the straight-line method over the estimated useful lives of the assets as follows:
Category
Term
Building
25 – 40 years
Site improvements
Lesser of the remaining life of building or useful lives
Long-Lived and Intangible Assets
Long-lived assets and certain identifiable intangibles to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.  The review of recoverability is based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the long-lived asset’s use and eventual disposition.  If impairment has occurred, the loss will be measured as the excess of the carrying amount of the asset over the fair value of the asset.
There were no impairment charges recorded on RSO’s investment in real estate or intangible assets during the three months ended March 31, 2013 and 2012.



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


B. Variable Interest Entities - RSO
RSO has evaluated its securities, loans, investments in unconsolidated entities, liabilities to subsidiary trusts issuing preferred securities (consisting of unsecured junior subordinated notes) and its CDOs in order to determine if they qualify as VIEs. RSO monitors these investments and, to the extent it has determined that it owns a material investment in the current controlling class of securities of a particular entity, analyzes the entity for potential consolidation. RSO will continually analyze investments and liabilities, including when there is a reconsideration event, to determine whether such investments or liabilities are VIEs and whether any such VIE should be consolidated. This analysis requires considerable judgment in determining the primary beneficiary of a VIE and could result in the consolidation of an entity that would otherwise not have been consolidated or the non-consolidation of an entity that would have otherwise been consolidated.
Consolidated VIEs (RSO is the primary beneficiary)
Based on management’s analysis, RSO is the primary beneficiary of seven VIEs at March 31, 2013: Apidos CDO I, Apidos CDO III, Apidos Cinco CDO, Apidos CLO VIII, RREF CDO 2006-1, RREF CDO 2007-1 and Whitney CLO I. In performing the primary beneficiary analysis for six of these VIEs (other than Whitney CLO I, which is discussed below), it was determined that the persons that have the power to direct the activities that are most significant to each of these VIEs and RSO who has the right to receive benefits and the obligation to absorb losses that could potentially be significant to these VIEs, are a related party group. It was then determined that RSO was the party within that group that is more closely associated to each such VIE because of its preferred equity (and in some cases debt) interest in them.
These CDO and CLO entities were formed on behalf of RSO (except for Whitney CLO I, referred to below) to invest in real estate-related securities, CMBS, property available-for-sale, bank loans, corporate bonds and asset-backed securities, ("ABS"), and were financed by the issuance of debt securities. CVC Credit Partners manages these entities on behalf of RSO. By financing these assets with long-term borrowings through the issuance of CDO and CLO bonds, RSO seeks to generate attractive risk-adjusted equity returns and to match the term of its assets and liabilities. The primary beneficiary determination for each of these VIEs was made at each VIE’s inception.
Whitney CLO I, the seventh consolidated VIE, is one in which RSO acquired the rights to manage the assets held by the entity as collateral for its CLOs in February 2011. For a discussion on the primary beneficiary analysis for Whitney CLO I see the section "Resource Capital Asset Management CLOs" below.
For CLOs in which RSO does not own 100% of the subordinated notes, RSO imputes an interest rate using expected cash flows over the life of the CLO and records the third party's share of the cash flows as interest expense on the RSO consolidated statement of income.
RSO has exposure to CDO and CLO losses to the extent of its subordinated debt and preferred equity interests in them. RSO is entitled to receive payments of principal and interest on the debt securities it holds and, to the extent revenues exceed debt service requirements and other expenses of the CDO or CLO, distributions with respect to its preferred equity interests. As a result of consolidation, debt and equity interests RSO holds in these CDOs and CLOs have been eliminated, and RSO’s consolidated balance sheet reflects both the assets held and debt issued by the CDOs and CLOs to third parties and any accrued expense to third parties. RSO's operating results and cash flows include the gross amounts related to CDO and CLO assets and liabilities as opposed to RSO's net economic interests in the CDO and CLO entities. Assets and liabilities related to the CDOs and CLOs are disclosed, in the aggregate, on RSO's consolidated balance sheets.
The creditors of RSO’s seven consolidated VIEs have no recourse to the general credit of RSO. However, in its capacity as manager, RSO has voluntarily supported two credits in one of its commercial real estate CDOs as the credits went through a restructuring in order to maximize their future cash flows. For the three months ended March 31, 2013 and 2012, RSO has provided financial support of $0 and $156,000, respectively. RSO has provided no financial support to any other of its VIEs nor does it have any requirement to do so, although it may choose to do so in the future to maximize future cash flows on such investments by RSO. There are no explicit arrangements or implicit variable interests that obligate RSO to provide financial support to any of its consolidated VIEs, although RSO may choose to do so in the future.

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


The following table shows the classification and carrying value of assets and liabilities of consolidated RSO VIEs as of March 31, 2013 (in thousands):
 
Apidos I
 
Apidos
III
 
Apidos
Cinco
 
Apidos
VIII
 
Whitney CLO I
 
RREF
2006
 
RREF
2007
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted cash (1)
$
41,833

 
$
8,546

 
$
26,439

 
$
13,241

 
$
16,832

 
$
19

 
$
710

 
$
107,620

Investment securities
available-for-sale, pledged as
collateral, at fair value
7,904

 
6,321

 
11,618

 
955

 
33,906

 
10,950

 
65,899

 
137,553

Loans, pledged as collateral
140,141

 
187,390

 
306,837

 
320,144

 
113,700

 
188,853

 
276,731

 
1,533,796

Loans held for sale
1,378

 
2,228

 
—

 
13,800

 
744

 
—

 
—

 
18,150

Interest receivable
9

 
798

 
1,176

 
871

 
423

 
1,153

 
2,097

 
6,527

Prepaid assets
39

 
24

 
32

 
56

 
68

 
48

 
36

 
303

Principal receivable
12

 
—

 
9

 
—

 
—

 
—

 
—

 
21

Other assets
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total assets (2)
$
191,316

 
$
205,307

 
$
346,111

 
$
349,067

 
$
165,673

 
$
201,023

 
$
345,473

 
$
1,803,970

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Borrowings
$
174,493

 
$
193,248

 
$
320,699

 
$
321,182

 
$
149,939

 
$
116,220

 
$
199,233

 
$
1,475,014

Accrued interest expense
346

 
82

 
321

 
1,372

 
234

 
52

 
121

 
2,528

Derivatives, at fair value
—

 
—

 
—

 
—

 
—

 
1,908

 
11,570

 
13,478

Accounts payable and
other liabilities
140

 
16

 
32

 
384

 
837

 
13

 
1

 
1,423

Total liabilities
$
174,979

 
$
193,346

 
$
321,052

 
$
322,938

 
$
151,010

 
$
118,193

 
$
210,925

 
$
1,492,443

                            
(1)    Includes $35.7 million available for reinvestment in certain of the CDOs.
(2)    Assets of each of the consolidated VIEs may only be used to settle the obligations of each respective VIE.
Unconsolidated VIEs (RSO is not the primary beneficiary, but has a variable interest)
Based on analysis by RSO's management, RSO is not the primary beneficiary of the VIEs discussed below since it does not have both (i) the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. Accordingly, the following VIEs are not consolidated in RSO’s consolidated financial statements as of March 31, 2013. RSO’s maximum exposure to risk for each of these unconsolidated VIEs is set forth in the “Maximum Risk Exposure” column in the table below.
LEAF
In the November 16, 2011 formation of LEAF, in exchange for its prior interests in its lease related investments, RSO received 31,341 shares of Series A Preferred Stock (the “Series A Preferred Stock”), 4,872 shares of newly issued 8% Series B Redeemable Preferred Stock (the “Series B Preferred Stock”) and 2,364 shares of newly issued Series D Redeemable Preferred Stock (the “Series D Preferred Stock”), collectively representing, on a fully-diluted basis assuming conversion, a 26.7% interest in LEAF. Several approaches were used, including discounted expected cash flows, market approach and comparable sales transactions to estimate the fair value of its investment in LEAF as a result of the transaction. 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. On January 18, 2013, RSO entered into another stock purchase agreement with LEAF to purchase 3,682 shares of newly issued Series A-1 Preferred Stock (the "Series A-1 Preferred Stock") for $3.7 million. As of March 31, 2013, RSO's fully-diluted interest in LEAF assuming conversion was 27.5%. During the second quarter of 2013, RSO entered into another stock purchase agreement with LEAF to purchase 3,323 shares of newly issued Series E Preferred Stock (the "Series E Preferred Stock") for $3.3 million. The Series E Preferred Stock has priority over all other classes of preferred stock. RSO’s investment in LEAF was held at $36.4 million and $33.1 million as of March 31, 2013 and December 31, 2012, respectively.

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


RSO determined that it is not the primary beneficiary of LEAF because it does not participate in any management or portfolio decisions, holds only two of six board positions, and only controls 27.5% of the voting rights in the entity. Furthermore, Eos Partners, L.P.. a third-party investor, holds consent rights with respect to significant LEAF actions, including incurrence of indebtedness, consummation of a sale of the entity, liquidation or initiating a public offering.
Unsecured Junior Subordinated Debentures
RSO has a 100% interest in the common shares of Resource Capital Trust I (“RCT I”) and RCC Trust II (“RCT II”), valued at $1.5 million in the aggregate (or 3% of each trust). RCT I and RCT II were formed for the purposes of providing debt financing to RSO, as described below. RSO completed a qualitative analysis to determine whether or not it is the primary beneficiary of each of the trusts and determined that it was not the primary beneficiary of either trust because it does not have the power to direct the activities most significant to the trusts, which include the collection of principal and interest and protection of collateral through servicing rights. Accordingly, neither trust is consolidated into RSO’s financial statements.
RSO records its investments in RCT I and RCT II’s common shares as investments in unconsolidated trusts using the cost method and records dividend income when declared by RCT I and RCT II. The trusts each hold subordinated debentures for which RSO is the obligor in the amount of $25.8 million for RCT I and $25.8 million for RCT II. The debentures were funded by the issuance of trust preferred securities of RCT I and RCT II. RSO will continuously reassess whether it should be deemed to be the primary beneficiary of the trusts.
Resource Capital Asset Management CLOs
In February 2011, RSO purchased a company that managed $1.9 billion of bank loan assets through five CLOs. As a result, RSO is entitled to collect senior, subordinated and incentive management fees from these CLOs. The purchase price of $22.5 million resulted in an intangible asset that was allocated to each of the five CLOs and is being amortized over the expected life of each CLO. The unamortized balance of the intangible asset was $12.6 million and $13.1 million at March 31, 2013 and December 31, 2012, respectively. RSO recognized fee income of $1.4 million and $1.9 million for the three months ended March 31, 2013 and 2012, respectively, With respect to four of these CLOs, RSO determined that it does not hold a controlling interest and, therefore, is not the primary beneficiary. One of the CLOs was liquidated in January 2013. With respect to the fifth CLO, Whitney CLO I, in October 2012, RSO purchased 66.6% of its preferred equity, which was determined to be a reconsideration event. Based upon that purchase, RSO determined that it does have an obligation to absorb losses and/or the right to receive benefits that could potentially be significant to Whitney CLO I and that a related party has the power to direct the activities that are most significant to the VIE. As a result, together with the related party, RSO has both the power to direct and the right to receive benefits and the obligation to absorb losses. It was then determined that, between RSO and the related party, RSO was the party within that group that is more closely associated with Whitney CLO I because of its preferred equity interest in Whitney CLO I. RSO, therefore, consolidated Whitney CLO I. In May 2013, RSO purchased additional equity in this CLO which increased its equity ownership to 68.3% of the outstanding preferred equity of Whitney CLO I. In September 2013, the Company liquidated Whitney CLO I, and as a result substantially all of the assets were sold. Total proceeds from the sale of these assets, plus proceeds from previous sales and paydowns in the CLO were used to pay down the remaining balance on the outstanding notes of $103.7 million.
Real Estate Joint Ventures
On December 1, 2009, RSO purchased a membership interest in RRE VIP Borrower, LLC (a VIE that holds interests in a real estate joint venture) from Resource America. This joint venture, which is structured as a credit facility with Värde Investment Partners, LP acting as lender, finances the acquisition of distressed properties and mortgage loans and has the objective of repositioning both the directly-owned properties and the properties underlying the mortgage loans to enhance their value. RSO acquired the membership interests for $2.1 million. The joint venture agreement requires RSO to contribute 3% to 5% (depending on the terms of the agreement pursuant to which the particular asset is being acquired) of the total funding required for each asset acquisition as needed up to a specified amount. RSO provided funding of $102,000 and $233,000 for the three months ended March 31, 2013 and 2012, respectively, for these investments. Resource Real Estate Management, LLC (“RREM”), an affiliate of the Company, acts as asset manager of the venture and receives a monthly asset management fee. RSO's investment in RRE VIP Borrower, LLC at March 31, 2013 and December 31, 2012 was $1.7 million and $2.3 million, respectively. Using the equity method of accounting, RSO recognized losses of $113,000 and a gain of $1.1 million related to this investment for the three months ended March 31, 2013 and 2012, respectively.
    

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


On June 19, 2012, RSO entered into a second joint venture with Värde Investment Partners, LP acting as lender, to purchase two condominium developments. RSO purchased a 7.5% equity interest in the venture. RSO may be subject to a capital call based on its pro rata share of equity interest in the venture up to the earlier of the end of the investment period, ending in May 2015, or the date the aggregate of all capital contributions exceeds $500.0 million. RREM was appointed as the asset manager of the venture to perform lease review and approval, debt service collection, loan workout, foreclosure, disposition and permitting, as applicable. RREM is also responsible for engaging third parties to perform day-to-day property management, property leasing, rent collection, maintenance, and capital improvements. RSO’s investment in the joint venture at March 31, 2013 and December 31, 2012 was $550,000 and $526,000, respectively. Using the equity method of accounting, RSO recognized equity in earnings related to this investment of $24,000 for the three months ended March 31, 2013, respectively. No such income was recorded for the three months ended March 31, 2012.
RSO has determined that it does not have the power to direct the activities that most significantly impact the economic performance of each of these ventures, which include asset underwriting and acquisition, lease review and approval, and loan asset servicing, and, therefore, RSO is not the primary beneficiary of either.
CVC Global Credit Opportunities Fund
In May, June, and July 2013, RSO invested a total of $15.0 million in CVC Global Credit Opportunities Fund, a fund which seeks to generate returns targeting corporate credit through a master-feeder fund structure. Because CVC Global Credit Opportunities Fund is not a VIE and RSO owns only 34.4%, RSO will not consolidate it. RSO records its investment in the fund using the equity method.
Life Care Funding
    
In 2013, Long Term Care Conversion, Inc. ("LTCC"), a wholly-owned subsidiary of RSO invested $2.0 million into Life Care Funding, LLC ("LCF") for the purpose of originating and acquiring life settlement contracts. Although the Investment Committee and Board are controlled by the joint venture partner, the joint venture partner must obtain LTCC's approval to make any investments and the joint venture partner must obtain LTCC approval for all material business operations. As a result, RSO's management determined that there was joint control and RSO will not consolidate LCF.

Harvest CLO VII Limited
In September 2013, RSO invested $5.3 million in the subordinated notes of a European CLO, which represented 9.52% of the subordinated notes. The CLO is managed by an independent third party and therefore RSO does not have control and is not deemed to be the primary beneficiary. Therefore, the CLO is not consolidated onto RSO's financial statements. RSO records its investment in the CLO by imputing an interest rate using expected cash flows over the expected life of the CLO and records the income as equity in net losses of unconsolidated subsidiaries on RSO's consolidated statement of income.
    

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


The following table shows the classification, carrying value and maximum exposure to loss with respect to RSO’s unconsolidated VIEs as of March 31, 2013 (in thousands):
 
Unconsolidated Variable Interest Entities
 
 
 
 
 
LEAF
Commercial
Capital, Inc.
 
Unsecured
Junior
Subordinated
Debentures
 
Resource
Capital
Asset
Management
CLOs
 
RRE VIP
Borrower,
LLC
 
Värde
Investment
Partners,
LP
 
Total
 
Maximum
Exposure
to Loss (1)
Investment in
unconsolidated entities
$
32,736

 
$
1,548

 
$
—

 
$
1,686

 
$
550

 
$
36,520

 
$
36,520

Intangible assets
—

 
—

 
12,589

 
—

 
—

 
12,589

 
$
12,589

Total assets
32,736

 
1,548

 
12,589

 
1,686

 
550

 
49,109

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Borrowings
—

 
50,861

 
—

 
—

 
—

 
50,861

 
N/A

Total liabilities
—

 
50,861

 
—

 
—

 
—

 
50,861

 
N/A

Net asset (liability)
$
32,736

 
$
(49,313
)
 
$
12,589

 
$
1,686

 
$
550

 
$
(1,752
)
 
N/A

 
(1)
RSO's maximum exposure to loss at March 31, 2013 does not exceed the carrying amount of its investment.
    
Other than the contingent obligation arrangement described above in connection with LEAF and the commitments RSO has to fund its real estate joint ventures, there were no explicit arrangements or implicit variable interests that could require RSO to provide financial support to any of its unconsolidated VIEs.
C. Supplemental Cash Flow Information - RSO
Supplemental disclosure of cash flow information (in thousands):
 
Three Months Ended
 
March 31,
 
2013
 
2012
Non-cash financing activities include the following:
 

 
 

Distributions on common stock declared but not paid
$
21,634

 
$
17,000

Distribution on preferred stock declared but not paid
$
1,311

 
$
—

Income taxes paid in cash
$
7,635

 
$
10,103

Issuance of restricted stock
$
35

 
$
472




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


D. Investment securities - Trading - RSO
The following table summarizes RSO's structured notes and residential mortgage-backed securities (“RMBS”) which are classified as investment securities, trading and carried at fair value (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
March 31, 2013:
 
 
 
 
 
 
 
Structured notes
$
16,803

 
$
10,964

 
$
(1,005
)
 
$
26,762

RMBS
6,025

 
1,426

 
(1,321
)
 
6,130

Total
$
22,828

 
$
12,390

 
$
(2,326
)
 
$
32,892

 
 
 
 
 
 
 
 
December 31, 2012:
 

 
 

 
 

 
 

Structured notes
$
9,413

 
$
10,894

 
$
(1,028
)
 
$
19,279

RMBS
6,047

 
858

 
(1,341
)
 
5,564

Total
$
15,460

 
$
11,752

 
$
(2,369
)
 
$
24,843

RSO purchased three securities and sold one security during the three months ended March 31, 2013, for a net gain of $434,000.  RSO held 15 and 13 investment securities, trading as of March 31, 2013 and December 31, 2012, respectively.

E. Investment Securities available-for-sale - RSO
If RSO finances the purchase of securities with repurchase agreements with the same counterparty from whom the securities are purchased and both transactions are entered into contemporaneously or in contemplation of each other, the transactions are presumed not to meet sale accounting criteria and RSO will account for the purchase of such securities and the repurchase agreement on a net basis and record a forward purchase commitment to purchase securities (each, a “Linked Transaction”) at fair value on RSO's consolidated balance sheet in RSO's line item Linked Transactions, at fair value. Changes in the fair value of the assets and liabilities underlying the Linked Transactions and associated interest income and expense are reported as unrealized gain (loss) and net interest income on linked transactions, net on RSO's consolidated statement of income. CMBS that are accounted for as components of Linked Transactions are not reflected in the tables set forth in this note, as they are accounted for as derivatives.
The following table summarizes RSO's investment securities, including those pledged as collateral and classified as available-for-sale, which are carried at fair value (in thousands):
 
Amortized
Cost (1) 
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
March 31, 2013
 
 
 
 
 
 
 
CMBS
$
189,990

 
$
7,766

 
$
(16,201
)
 
$
181,555

ABS
23,682

 
1,851

 
(712
)
 
24,821

Corporate bonds
35,678

 
256

 
(51
)
 
35,883

Other asset-backed
—

 
23

 
—

 
23

Total
$
249,350

 
$
9,896

 
$
(16,964
)
 
$
242,282

 
 
 
 
 
 
 
 
December 31, 2012
 

 
 

 
 

 
 

CMBS
$
182,828

 
$
4,626

 
$
(16,639
)
 
$
170,815

ABS
26,479

 
1,700

 
(1,115
)
 
27,064

Corporate Bonds
33,767

 
111

 
(190
)
 
33,688

Other asset-backed
—

 
23

 
—

 
23

Total
$
243,074

 
$
6,460

 
$
(17,944
)
 
$
231,590

 
(1)
As of March 31, 2013 and December 31, 2012, $192.7 million and $195.2 million, respectively, of securities were pledged as collateral security under related financings.        

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


The following table summarizes the estimated maturities of RSO’s CMBS, ABS, and corporate bonds according to their estimated weighted average life classifications (in thousands, except percentages):
Weighted Average Life
Fair Value
 
Amortized
Cost
 
Weighted
Average
Coupon
March 31, 2013
 
 
 
 
 
Less than one year
$
46,592

(1) 
$
50,319

 
4.30%
Greater than one year and less than five years
131,401

 
135,955

 
4.51%
Greater than five years and less than ten years
54,758

 
53,475

 
3.42%
Greater than ten years
9,531

 
9,601

 
3.70%
Total
$
242,282

 
$
249,350

 
4.19%
 
 
 
 
 
 
December 31, 2012
 

 
 

 
 
Less than one year
$
42,618

(1) 
$
46,522

 
4.09%
Greater than one year and less than five years
122,509

 
131,076

 
4.55%
Greater than five years and less than ten years
61,780

 
60,801

 
3.31%
Greater than ten years
4,683

 
4,675

 
4.03%
Total
$
231,590

 
$
243,074

 
4.12%
 
(1)    RSO expects that the maturity date of these CMBS will either be extended or the CMBS will be paid in full.
The contractual maturities of the CMBS investment securities available-for-sale range from May 2013 to April 2027.  The contractual maturities of the ABS investment securities available-for-sale range from November 2015 to August 2022. The contractual maturities of the corporate bond investment securities available-for-sale range from May 2014 to February 2022.
The following table shows the fair value and gross unrealized losses, aggregated by investment category and length of time, of those individual investment securities available-for-sale that have been in a continuous unrealized loss position during the periods specified (in thousands):
 
Less than 12 Months
 
More than 12 Months
 
Total
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
CMBS
$
42,706

 
$
(893
)
 
$
21,498

 
$
(15,308
)
 
$
64,204

 
$
(16,201
)
ABS
—

 
—

 
6,365

 
(712
)
 
6,365

 
(712
)
Corporate bonds
14,203

 
(51
)
 
—

 
—

 
14,203

 
(51
)
Total temporarily impaired securities
$
56,909

 
$
(944
)
 
$
27,863

 
$
(16,020
)
 
$
84,772

 
$
(16,964
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 

 
 

 
 

 
 

 
 

 
 

CMBS
$
25,803

 
$
(442
)
 
$
38,734

 
$
(16,197
)
 
$
64,537

 
$
(16,639
)
ABS
—

 
—

 
5,961

 
(1,115
)
 
5,961

 
(1,115
)
Corporate bonds
19,445

 
(190
)
 
—

 
—

 
19,445

 
(190
)
Total temporarily impaired securities
$
45,248

 
$
(632
)
 
$
44,695

 
$
(17,312
)
 
$
89,943

 
$
(17,944
)

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


RSO held 15 and 19 CMBS investment securities available-for-sale that have been in a loss position for more than 12 months as of March 31, 2013 and December 31, 2012, respectively.  RSO held nine ABS investment securities available-for-sale that have been in a loss position for more than 12 months as of March 31, 2013 and December 31, 2012, respectively.  RSO had no corporate bonds that have been in a loss position for more than 12 months as of March 31, 2013 and December 31, 2012. The unrealized losses in the above table are considered to be temporary impairments due to market factors and are not reflective of credit deterioration.
The determination of other-than-temporary impairment is a subjective process, and different judgments and assumptions could affect the timing of loss realization.  RSO reviews its portfolios and makes other-than-temporary impairment determinations at least quarterly.  RSO considers the following factors when determining if there is an other-than-temporary impairment on a security:    
•
the length of time the market value has been less than amortized cost;
•
the severity of the impairment;
•
the expected loss of the security as generated by a third-party valuation model;
•
original and current credit ratings from the rating agencies;
•
underlying credit fundamentals of the collateral backing the securities;
•
whether, based upon RSO’s intent, it is more likely than not that RSO will sell the security before the recovery of the amortized cost basis; and
•
third-party support for default, for recovery, prepayment speed and reinvestment price assumptions.
At March 31, 2013 and December 31, 2012, RSO held $181.5 million and $170.8 million, respectively, (net of unrealized losses of $8.4 million and $12.0 million, respectively), of CMBS recorded at fair value.  To determine fair value, RSO uses dealer quotes which are either provided by RSO's trade or financing counterparties.
At March 31, 2013 and December 31, 2012, RSO held $24.8 million and $27.1 million, respectively, (net of unrealized gains of $1.1 million and $574,000, respectively), of ABS recorded at fair value.  To determine their fair value, RSO uses dealer quotes.
At March 31, 2013 and December 31, 2012, RSO held $35.9 million and $33.7 million, respectively, (net of unrealized losses of $206,000 and losses of $67,000, respectively), of corporate bonds recorded at fair value. To determine their fair value, RSO uses dealer quotes.
 RSO’s securities classified as available-for-sale have increased in fair value on a net basis as of March 31, 2013 as compared to December 31, 2012, primarily due to improving dealer marks and new purchases in 2013. RSO performs an on-going review of third-party reports and updated financial data on the underlying properties in order to analyze current and projected security performance.  Rating agency downgrades are considered with respect to RSO’s income approach when determining other-than-temporary impairment and, when inputs are subjected to testing for economic changes within possible ranges, the resulting projected cash flows reflect a full recovery of principal and interest indicating no impairment. During the three months ended March 31, 2013 and 2012, RSO did not recognize any other-than-temporary impairment on positions that supported RSO's CMBS investment.
During the three months ended March 31, 2013, RSO sold two corporate bond positions with a total par value of $700,000 and recognized a gain of $18,000, During the three months ended March 31, 2012, RSO sold three corporate bond positions with a total par value of $1.4 million, and recognized a gain $27,000. During the three months ended March 31, 2012, RSO had one corporate bond positions redeemed with a total par value of $182,000, and recognized a gain of $39,000. There were no such redemptions during the three months ended March 31, 2013.

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


Changes in interest rates may also have an effect on the rate of mortgage principal prepayments and, as a result, prepayments on CMBS in RSO’s investment portfolio.  At March 31, 2013 and December 31, 2012, the aggregate discount due to interest rate changes exceeded the aggregate premium on RSO’s CMBS by approximately $7.6 million and $8.0 million, respectively.  At March 31, 2013 and December 31, 2012, the aggregate discount on RSO’s ABS portfolio was $2.9 million and $3.1 million, respectively.  There were no premiums on RSO’s ABS investment portfolio at March 31, 2013 and December 31, 2012. At March 31, 2013 and December 31, 2012, the aggregate premium on RSO’s corporate bond portfolio was $425,000 and $608,000, respectively.
F. Investment in real estate - RSO
The table below summarizes RSO’s investments in real estate (in thousands):
 
As of March 31, 2013
 
As of December 31, 2012
 
Book Value
 
Number of
Properties
 
Book Value
 
Number of
Properties
Multi-family property
$
42,538

 
2
 
$
42,179

 
2
Office property
10,149

 
1
 
10,149

 
1
Hotel property
25,668

 
1
 
25,608

 
1
Subtotal
78,355

 
 
 
77,936

 
 
Less:  Accumulated depreciation
(3,213
)
 
 
 
(2,550
)
 
 
Investments in real estate
$
75,142

 
 
 
$
75,386

 
 
During the three months ended March 31, 2013, RSO made no acquisitions. During the year ended December 31, 2012, RSO foreclosed on one self-originated loan and converted the loan to equity with a fair value of $25.5 million at acquisition. The loan was collateralized by a 179 unit hotel property in Coconut Grove, Florida. The property had an occupancy rate of 75% at acquisition.
The following table is a summary of the aggregate estimated fair value of the assets and liabilities acquired on the respective date of acquisition during the year ended December 31, 2012 (in thousands). There were no such acquisitions during the three months ended March 31, 2013.
Description
 
December 31, 2012
Assets acquired:
 
 
Investments in real estate
 
$
25,500

Other assets
 
(89
)
Total assets acquired
 
25,411

Liabilities assumed:
 
 

Accounts payable and other liabilities
 
3,750

Total liabilities assumed
 
3,750

Estimated fair value of net assets acquired
 
$
21,661



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


G. Loans held for investment - RSO
The following is a summary of RSO’s loans (in thousands):
Loan Description
 
Principal
 
Unamortized
(Discount)
Premium (1)
 
Carrying
Value (2)
March 31, 2013
 
 
 
 
 
 
Bank loans (3) 
 
$
1,114,684

 
$
(20,501
)
 
$
1,094,183

Commercial real estate loans:
 
 

 
 

 
 

Whole loans
 
552,449

 
(2,035
)
 
550,414

B notes
 
16,399

 
(106
)
 
16,293

Mezzanine loans
 
82,967

 
(191
)
 
82,776

Total commercial real estate loans
 
651,815

 
(2,332
)
 
649,483

Subtotal loans before allowances
 
1,766,499

 
(22,833
)
 
1,743,666

Allowance for loan loss
 
(16,976
)
 
—

 
(16,976
)
Total
 
$
1,749,523

 
$
(22,833
)
 
$
1,726,690

 
 
 
 
 
 
 
December 31, 2012
 
 

 
 

 
 

Bank loans (3) 
 
$
1,218,563

 
$
(25,249
)
 
$
1,193,314

Commercial real estate loans:
 
 

 
 

 
 

Whole loans (4)
 
569,829

 
(1,891
)
 
567,938

B notes
 
16,441

 
(114
)
 
16,327

Mezzanine loans
 
82,992

 
(206
)
 
82,786

Total commercial real estate loans
 
669,262

 
(2,211
)
 
667,051

Subtotal loans before allowances
 
1,887,825

 
(27,460
)
 
1,860,365

Allowance for loan loss
 
(17,691
)
 
—

 
(17,691
)
Total
 
$
1,870,134

 
$
(27,460
)
 
$
1,842,674

 
(1)
Amounts include deferred amendment fees of $375,000 and $450,000 and deferred upfront fees of $310,000 and $334,000 being amortized over the life of the bank loans as of March 31, 2013 and December 31, 2012, respectively.  Amounts include loan origination fees of $2.0 million and $1.9 million and loan extension fees of $194,000 and $214,000 being amortized over the life of the commercial real estate loans as of March 31, 2013 and December 31, 2012, respectively.
(2)
Substantially all loans are pledged as collateral under various borrowings at March 31, 2013 and December 31, 2012, respectively.
(3)
Amounts include $18.2 million and $14.9 million of bank loans held for sale at March 31, 2013 and December 31, 2012, respectively.
(4)
Amount includes $34.0 million from two whole loans which are classified as loans held for sale at December 31, 2012.
At March 31, 2013 and December 31, 2012, approximately 48.1% and 47.7%, respectively, of RSO’s commercial real estate loan portfolio was concentrated in commercial real estate loans located in California; approximately 8.1% and 7.9%, respectively, in Arizona; and approximately 11.0% and 11.1%, respectively, in Texas.  At March 31, 2013 and December 31, 2012, approximately 14.2% and 13.2%, of RSO’s bank loan portfolio was concentrated in the collective industry grouping of healthcare, education and childcare.
At March 31, 2013, RSO’s bank loan portfolio consisted of $1.1 billion (net of allowance of $7.8 million) of floating rate loans, which bear interest ranging between the three month London Interbank Offered Rate (“LIBOR”) plus 1.5% and three month LIBOR plus 10.5% with maturity dates ranging from December 2013 to March 2021.

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


At December 31, 2012, RSO’s bank loan portfolio consisted of $1.2 billion (net of allowance of $9.7 million) of floating rate loans, which bear interest ranging between the three month LIBOR plus 1.5% and three month LIBOR plus 8.8% with maturity dates ranging from August 2013 to January 2021.
The following is a summary of the weighted average life of RSO’s bank loans, at amortized cost (in thousands):
 
March 31,
2013
 
December 31,
2012
Less than one year
$
31,046

 
$
10,028

Greater than one year and less than five years
687,786

 
821,568

Five years or greater
375,351

 
361,718

 
$
1,094,183

 
$
1,193,314

    
The following is a summary of RSO’s commercial real estate loans held for investment (dollars in thousands):
Description
 
Quantity
 
Amortized Cost
 
Contracted
Interest Rates
 
Maturity
Dates (3)
March 31, 2013:
 
 
 
 
 
 
 
 
Whole loans, floating rate (1) (5)
 
35
 
$
550,414

 
LIBOR plus 2.50% to
LIBOR plus 5.5%
 
June 2013 to
February 2019
B notes, fixed rate
 
1
 
16,293

 
8.68%
 
April 2016
Mezzanine loans, floating rate
 
2
 
15,848

 
LIBOR plus 2.50% to
LIBOR plus 7.45%
 
August 2013 to
December 2013
Mezzanine loans, fixed rate (7)
 
3
 
66,928

 
0.50% to 20.00%
 
September 2014 to
September 2019
Total (2) 
 
41
 
$
649,483

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012:
 
 
 
 

 
 
 
 
Whole loans, floating rate (1) (4) (5) (6)
 
37
 
$
567,938

 
LIBOR plus 2.50% to
LIBOR plus 5.50%
 
June 2013 to
February 2019
B notes, fixed rate
 
1
 
16,327

 
8.68%
 
April 2016
Mezzanine loans, floating rate
 
2
 
15,845

 
LIBOR plus 2.50% to
LIBOR plus 7.45%
 
August 2013 to
December 2013
Mezzanine loans, fixed rate (7)
 
3
 
66,941

 
0.50% to 20.00%
 
September 2014 to
September 2019
Total (2) 
 
43
 
$
667,051

 
 
 
 
 
(1)
Whole loans had $9.5 million and $8.9 million in unfunded loan commitments as of March 31, 2013 and December 31, 2012, respectively.  These commitments are funded as the borrowers request additional funding and have satisfied the requirements to obtain this additional funding.
(2)
The total does not include an allowance for loan loss of $9.2 million and $8.0 million as of March 31, 2013 and December 31, 2012, respectively.
(3)
Maturity dates do not include possible extension options that may be available to the borrowers.
(4)
Floating rate whole loans include a $2.0 million portion of a whole loan that has a fixed rate of 15% as of December 31, 2012.
(5)
Floating rate whole loans include a $1.0 million portion of a whole loan that has a fixed rate of 10% as of March 31, 2013 and December 31, 2012, respectively.
(6)
Amount includes $34.0 million from two whole loans that were classified as loans held for sale at December 31, 2012.
(7)
Fixed rate mezzanine loans include a mezzanine loan that was modified into two tranches which both currently pay interest at 0.50%. In addition, the subordinate tranche accrues interest at LIBOR plus 18.5% which is deferred until maturity.

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


The following is a summary of the weighted average life of RSO’s commercial real estate loans, at amortized cost (in thousands):
Description
 
2013
 
2014
 
2015 and Thereafter
 
Total
March 31, 2013
 
 
 
 
 
 
 
 
B notes
 
$
—

 
$
—

 
$
16,293

 
$
16,293

Mezzanine loans
 
5,331

 
20,710

 
56,735

 
82,776

Whole loans
 
3,312

 
—

 
547,102

 
550,414

Total (1) 
 
$
8,643

 
$
20,710

 
$
620,130

 
$
649,483

 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
B notes
 
$
—

 
$
—

 
$
16,327

 
$
16,327

Mezzanine loans
 
5,328

 
20,694

 
56,764

 
82,786

Whole loans
 
71,799

 
—

 
496,139

 
567,938

Total (1) 
 
$
77,127

 
$
20,694

 
$
569,230

 
$
667,051

 
(1)
Weighted average life of commercial real estate loans assumes full exercise of extension options available to borrowers.
The following is a summary of the allocation of the allowance for loan loss with respect to RSO’s commercial real estate and bank loans (in thousands, except percentages) by asset class:
Description
 
Allowance for
Loan Loss
 
Percentage of
Total Allowance
March 31, 2013:
 
 
 
 
B notes
 
$
219

 
1.29%
Mezzanine loans
 
914

 
5.38%
Whole loans
 
8,022

 
47.26%
Bank loans
 
7,821

 
46.07%
Total
 
$
16,976

 
 
 
 
 
 
 
December 31, 2012:
 
 

 
 
B notes
 
$
206

 
1.17%
Mezzanine loans
 
860

 
4.85%
Whole loans
 
6,920

 
39.12%
Bank loans
 
9,705

 
54.86%
Total
 
$
17,691

 
 
As of March 31, 2013, RSO had recorded an allowance for loan losses of $17.0 million consisting of a $7.8 million allowance on RSO’s bank loan portfolio and a $9.2 million allowance on RSO’s commercial real estate portfolio as a result of the provisions taken on five bank loans and one commercial real estate loan as well as the maintenance of a general reserve with respect to these portfolios. The whole loan allowance increased $1.1 million from $6.9 million as of December 31, 2012 to $8.0 million as of March 31, 2013 as a result of a specific provision taken on one commercial real estate loan.
As of December 31, 2012, RSO had recorded an allowance for loan losses of $17.7 million consisting of a $9.7 million allowance on RSO’s bank loan portfolio and a $8.0 million allowance on RSO’s commercial real estate portfolio as a result of the impairment of one bank loan and four commercial real estate loans as well as the maintenance of a general reserve with respect to these portfolios.


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


H. Investments in unconsolidated entities - RSO
In January 2013, LTCC invested $2.0 million into LCF for the purpose of originating and acquiring life settlement contracts. Although the Investment Committee and Board are controlled by the joint venture partner, the joint venture partner must obtain LTCC's unanimous approval to make any investments and the joint venture partner must obtain LTCC approval for all material business operations. As a result, RSO determined that there was joint control and, therefore, neither RSO nor its joint venture partner will consolidate LCF.
On June 19, 2012, RSO entered into a joint venture with Värde Investment Partners, LP acting as lender, to purchase two condominium developments.  RSO purchased a 7.5% equity interest in the venture. RREM, was appointed as the asset manager of the venture to perform lease review and approval, debt service collection, loan workout, foreclosure, disposition and permitting, as applicable.  RREM is also responsible for engaging third parties to perform day-to-day property management, property leasing, rent collection, maintenance, and capital improvements. For the three months ended March 31, 2013, RSO recorded earnings of $24,000, which were recorded in equity in net losses of unconsolidated subsidiaries on RSO's consolidated statement of income.  There were no such income for the three months ended March 31, 2012. The investment balance of $550,000 and $526,000 at March 31, 2013 and December 31, 2012, respectively, is recorded as an investment in unconsolidated entities on RSO's consolidated balance sheet using the equity method.
On November 16, 2011, RSO and the Company, entered into a SPA with Eos Partners, L.P.  In exchange for RSO's prior interest in LEAF, RSO received 31,341 shares of Series A Preferred Stock, 4,872 shares of newly issued 8% Series B Redeemable Preferred Stock and 2,364 shares of newly issued Series D Redeemable Preferred Stock, collectively representing, on a fully-diluted basis assuming conversion, a 26.7% interest in LEAF.  RSO’s investment in LEAF was valued at $36.3 million based on a third-party valuation.  Several approaches were used, including discounted expected cash flows, market approach and comparable sales transactions to estimate the fair value of its investment in LEAF as a result of the transaction.  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. RSO recorded a loss of $2.2 million in conjunction with the transaction.  On January 18, 2013, RSO entered into another stock purchase agreement with LEAF to purchase 3,682 shares of newly issued Series A-1 Preferred Stock for $3.7 million. During the second quarter of 2013, RSO entered into another stock purchase agreement with LEAF to purchase 3,323 shares of newly issued Series E Preferred Stock for $3.3 million. The Series E Preferred Stock has priority over all other classes of preferred stock. RSO accrued $207,000 on the Series E Preferred Stock shares to date. RSO's fully-diluted basis assuming conversion is 27.5%. RSO’s interest in the investment is accounted for under the equity method.  RSO recorded losses of $336,000 for the three months ended March 31, 2013, which was recorded in equity in net losses of unconsolidated subsidiaries on the RSO consolidated statements of income. RSO recorded no income or losses for the three months ended March 31, 2012. RSO’s investment in LEAF was carried at $36.4 million and $33.1 million as of March 31, 2013 and December 31, 2012, respectively.
On December 1, 2009, RSO purchased a membership interest in RRE VIP Borrower, LLC (an unconsolidated VIE that holds RSO's interests in a real estate joint venture) from the Company at book value.  This joint venture, which is structured as a credit facility with Värde Investment Partners, LP acting as lender, finances the acquisition of distressed properties and mortgage loans and has the objective of repositioning both the directly-owned properties and the properties underlying the mortgage loans to enhance their value.  RSO acquired the membership interests for $2.1 million. The agreement requires RSO to contribute 3% to 5% (depending on the asset agreement) of the total funding required for each asset acquisition on a monthly basis.  RREM acts as asset manager of the venture and receives a monthly asset management fee equal to 1% of the combined investment calculated as of the last calendar day of the month. For the three months ended March 31, 2013, RSO paid RREM management fees of $8,000 and $12,000, respectively. For the three months ended March 31, 2013 and 2012, RSO recorded losses of $113,000 and a gain of $1.1 million, respectively, which was recorded in equity in net (losses) earnings of unconsolidated subsidiaries on the RSO consolidated statement of income.  The investment balance of $1.7 million and $2.3 million at March 31, 2013 and December 31, 2012, respectively, is recorded as an investment in unconsolidated entities on RSO's consolidated balance sheet using the equity method.
RSO has a 100% interest valued at $1.5 million in the common shares (3% of the total equity) in two trusts, RCT I and RCT II and determined it was not the primary beneficiary of either trust. RSO records its investments in RCT I and RCT II’s common shares of $774,000 each as investments in unconsolidated trusts using the cost method and records dividend income upon declaration by RCT I and RCT II.  For the three months ended March 31, 2013 and 2012, RSO recognized $593,000 and $631,000, respectively, of interest expense with respect to the subordinated debentures it issued to RCT I and RCT II which included $47,000 and $45,000, respectively, of amortization of deferred debt issuance costs.  RSO will continuously reassess whether it should be deemed to be the primary beneficiary of the trusts.  

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


I. Financing receivables - RSO
The following tables show the allowance for loan losses and recorded investments in loans for the years indicated (in thousands):
 
Commercial Real Estate Loans
 
Bank Loans
 
Loans Receivable-Related Party
 
Total
March 31, 2013:
 
 
 
 
 
 
 
Allowance for Loan Losses:
 
 
 
 
 
 
 
Allowance for losses at January 1, 2013
$
7,986

 
$
9,705

 
$
—

 
$
17,691

Provision (benefit) for loan loss
1,261

 
(219
)
 
—

 
1,042

Loans charged-off
(92
)
 
(1,665
)
 
—

 
(1,757
)
Allowance for losses at March 31, 2013
$
9,155

 
$
7,821

 
$
—

 
$
16,976

Ending balance:
 

 
 

 
 

 
 

Individually evaluated for impairment
$
3,311

 
$
2,607

 
$
—

 
$
5,918

Collectively evaluated for impairment
$
5,844

 
$
5,214

 
$
—

 
$
11,058

Loans acquired with deteriorated credit quality
$
—

 
$
—

 
$
—

 
$
—

Loans:
 

 
 

 
 

 
 

Ending balance:
 

 
 

 
 

 
 

Individually evaluated for impairment
$
180,262

 
$
3,896

 
$
7,860

 
$
192,018

Collectively evaluated for impairment
$
469,221

 
$
1,090,287

 
$
—

 
$
1,559,508

Loans acquired with deteriorated credit quality
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
December 31, 2012:
 

 
 

 
 

 
 

Allowance for Loan Losses:
 
 
 
 
 
 
 
Allowance for losses at January 1, 2012
$
24,221

 
$
3,297

 
$
—

 
$
27,518

Provision for loan loss
5,225

 
11,593

 
—

 
16,818

Loans charged-off
(21,460
)
 
(5,185
)
 
—

 
(26,645
)
Allowance for losses at December 31, 2012
$
7,986

 
$
9,705

 
$
—

 
$
17,691

Ending balance:
 

 
 

 
 

 
 

Individually evaluated for impairment
$
2,142

 
$
3,236

 
$
—

 
$
5,378

Collectively evaluated for impairment
$
5,844

 
$
6,469

 
$
—

 
$
12,313

Loans acquired with deteriorated credit quality
$
—

 
$
—

 
$
—

 
$
—

Loans:
 

 
 

 
 

 
 

Ending balance:
 

 
 

 
 

 
 

Individually evaluated for impairment
$
177,055

 
$
4,689

 
$
8,324

 
$
190,068

Collectively evaluated for impairment
$
489,996

 
$
1,187,874

 
$
—

 
$
1,677,870

Loans acquired with deteriorated credit quality
$
—

 
$
751

 
$
—

 
$
751

Credit quality indicators
Bank Loans
RSO uses a risk grading matrix to assign grades to bank loans.  Loans are graded at inception and updates to assigned grades are made continually as new information is received.  Loans are graded on a scale of 1-5 with 1 representing RSO’s highest rating and 5 representing its lowest rating.  RSO also designates loans that are sold after the period end as held for sale at the lower of their fair market value or cost, net of any allowances and costs associated with the loan sales.  RSO considers metrics such as performance of the underlying company, liquidity, collectability of interest, enterprise valuation, default probability, ratings from rating agencies, and industry dynamics in grading its bank loans.

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


Credit risk profiles of bank loans were as follows (in thousands):
 
Rating 1
 
Rating 2
 
Rating 3
 
Rating 4
 
Rating 5
 
Held for Sale
 
Total
As of March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank loans
$
979,854

 
$
43,387

 
$
32,626

 
$
16,270

 
$
3,896

 
$
18,150

 
$
1,094,183

 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2012
 

 
 

 
 

 
 

 
 

 
 

 
 
Bank loans
$
1,095,148

 
$
33,677

 
$
27,837

 
$
16,318

 
$
5,440

 
$
14,894

 
$
1,193,314

All of RSO’s bank loans are performing with the exception of four loans with an amortized cost of $3.9 million as of March 31, 2013. There were no additional defaults during the three months ended March 31, 2013 As of December 31, 2012, all of RSO's bank loans were performing with the exception of five loans with an amortized cost of $5.4 million, one of which defaulted as of December 31, 2012, three of which defaulted as of March 31, 2012 (including a loan acquired with deteriorated credit quality as a result of the acquisition of Whitney CLO I), and one of which defaulted on December 31, 2011.
Commercial Real Estate Loans
RSO uses a risk grading matrix to assign grades to commercial real estate loans.  Loans are graded at inception and updates to assigned grades are made continually as new information is received.  Loans are graded on a scale of 1-4 with 1 representing RSO’s highest rating and 4 representing its lowest rating.  RSO also designates loans that are sold after the period end at the lower of their fair market value or cost, net of any allowances and costs associated with the loan sales.  In addition to the underlying performance of the loan collateral, RSO considers metrics such as the strength of underlying sponsorship, payment history, collectability of interest, structural credit enhancements, market trends and loan terms in grading its commercial real estate loans.
Credit risk profiles of commercial real estate loans were as follows (in thousands):
 
Rating 1
 
Rating 2
 
Rating 3
 
Rating 4
 
Held for Sale
 
Total
As of March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Whole loans
$
497,052

 
$
—

 
$
53,362

 
$
—

 
$
—

 
$
550,414

B notes
16,293

 
—

 
—

 
—

 
—

 
16,293

Mezzanine loans
44,704

 
—

 
38,072

 
—

 
—

 
82,776

 
$
558,049

 
$
—

 
$
91,434

 
$
—

 
$
—

 
$
649,483

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2012
 

 
 

 
 

 
 

 
 

 
 

Whole loans
$
427,456

 
$
—

 
$
106,482

 
$
—

 
$
34,000

 
$
567,938

B notes
16,327

 
—

 
—

 
—

 
—

 
16,327

Mezzanine loans
38,296

 
—

 
44,490

 
—

 
—

 
82,786

 
$
482,079

 
$
—

 
$
150,972

 
$
—

 
$
34,000

 
$
667,051

All of RSO’s commercial real estate loans were performing as of March 31, 2013 and March 31, 2012.

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


Loan Portfolios Aging Analysis
The following table shows the loan portfolio aging analysis as of the dates indicated at cost basis (in thousands):
 
30-59 Days
 
60-89 Days
 
Greater than 90 Days
 
Total Past Due
 
Current
 
Total Loans Receivable
 
Total Loans > 90 Days and Accruing
March 31, 2013:
 

 
 

 
 
 
 
 
 
 
 
 
 
Whole loans
$
—

 
$
—

 
$
—

 
$
—

 
$
550,414

 
$
550,414

 
$
—

B notes
—

 
—

 
—

 
—

 
16,293

 
16,293

 
—

Mezzanine loans
—

 
—

 
—

 
—

 
82,776

 
82,776

 
—

Bank loans
—

 
1,553

 
2,343

 
3,896

 
1,090,287

 
1,094,183

 
—

Loans receivable- related party
—

 
—

 
—

 
—

 
7,860

 
7,860

 
—

Total loans
$
—

 
$
1,553

 
$
2,343

 
$
3,896

 
$
1,747,630

 
$
1,751,526

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012:
 

 
 

 
 

 
 

 
 

 
 

 
 

Whole loans
$
—

 
$
—

 
$
—

 
$
—

 
$
567,938

 
$
567,938

 
$
—

B notes
—

 
—

 
—

 
—

 
16,327

 
16,327

 
—

Mezzanine loans
—

 
—

 
—

 
—

 
82,786

 
82,786

 
—

Bank loans
1,549

 
—

 
3,891

 
5,440

 
1,187,874

 
1,193,314

 
—

Loans receivable- related party
—

 
—

 
—

 
—

 
8,324

 
8,324

 
—

Total loans
$
1,549

 
$
—

 
$
3,891

 
$
5,440

 
$
1,863,249

 
$
1,868,689

 
$
—


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


Impaired Loans
The following tables show impaired loans in the categories indicated (in thousands):
 
Recorded Balance
 
Unpaid Principal Balance
 
Specific Allowance
 
Average Investment in Impaired Loans
 
Interest Income Recognized
March 31, 2013:
 
 
 
 
 
 
 
 
 
Loans without a specific valuation allowance:
 
 
 
 
 
 
 
 
 
Whole loans
$
116,628

 
$
116,628

 
$
—

 
$
115,037

 
$
4,515

B notes
—

 
—

 
—

 
—

 
—

Mezzanine loans
38,072

 
38,072

 
—

 
38,072

 
675

Bank loans
—

 
—

 
—

 
—

 
—

Loans receivable - related party
6,289

 
6,289

 
—

 
—

 
178

Loans with a specific valuation allowance:
 

 
 

 
 

 
 

 
 

Whole loans
24,313

 
24,313

 
(3,313
)
 
22,872

 
995

B notes
—

 
—

 
—

 
—

 
—

Mezzanine loans
—

 
—

 
—

 
—

 
—

Bank loans
3,896

 
3,896

 
(2,607
)
 
—

 
—

Loans receivable - related party
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
Total:
 

 
 

 
 

 
 

 
 

Whole loans
$
140,941

 
$
140,941

 
$
(3,313
)
 
$
137,909

 
$
5,510

B notes
—

 
—

 
—

 
—

 
—

Mezzanine loans
38,072

 
38,072

 
—

 
38,072

 
675

Bank loans
3,896

 
3,896

 
(2,607
)
 
—

 
—

Loans receivable - related party
6,289

 
6,289

 
—

 
—

 
178

 
$
189,198

 
$
189,198

 
$
(5,920
)
 
$
175,981

 
$
6,363

 
 
 
 
 
 
 
 
 
 
December 31, 2012:
 

 
 

 
 

 
 

 
 

Loans without a specific valuation allowance:
 

 
 

 
 

 
 

 
 

Whole loans
$
115,841

 
$
115,841

 
$
—

 
$
114,682

 
$
3,436

B notes
—

 
—

 
—

 
—

 
—

Mezzanine loans
38,072

 
38,072

 
—

 
38,072

 
367

Bank loans
—

 
—

 
—

 
—

 
—

Loans receivable - related party
6,754

 
6,754

 
—

 
—

 
851

Loans with a specific valuation allowance:
 

 
 

 
 

 
 

 
 

Whole loans
23,142

 
23,142

 
(2,142
)
 
22,576

 
801

B notes
—

 
—

 
—

 
—

 
—

Mezzanine loans
—

 
—

 
—

 
—

 
—

Bank loans
5,440

 
5,440

 
(3,236
)
 
—

 
—

Loans receivable - related party
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
Total:
 

 
 

 
 

 
 

 
 

Whole loans
$
138,983

 
$
138,983

 
$
(2,142
)
 
$
137,258

 
$
4,237

B notes
—

 
—

 
—

 
—

 
—

Mezzanine loans
38,072

 
38,072

 
—

 
38,072

 
367

Bank loans
5,440

 
5,440

 
(3,236
)
 
—

 
—

Loans receivable - related party
6,754

 
6,754

 
—

 
—

 
851

 
$
189,249

 
$
189,249

 
$
(5,378
)
 
$
175,330

 
$
5,455


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


Troubled- Debt Restructurings
The following tables show troubled-debt restructurings in RSO's loan portfolio (in thousands):
 
Number of Loans
 
Pre-Modification Outstanding Recorded Balance
 
Post-Modification Outstanding Recorded Balance
Three Months Ended March 31, 2013:
 
 
 
 
 
Whole loans
6
 
$
153,958

 
$
136,672

B notes
—
 
—

 
—

Mezzanine loans
1
 
38,072

 
38,072

Bank loans
—
 
—

 
—

Loans receivable - related party
1
 
7,797

 
7,797

Total loans
8
 
$
199,827

 
$
182,541

 
 
 
 
 
 
Three Months Ended March 31, 2012:
 
 
 

 
 

Whole loans
4
 
$
133,955

 
$
115,894

B notes
—
 
—

 
—

Mezzanine loans
—
 
—

 
—

Bank loans
—
 
—

 
—

Loans receivable
—
 
—

 
—

Loans receivable - related party
1
 
7,797

 
7,797

Total loans
5
 
$
141,752

 
$
123,691

As of March 31, 2013 and 2012, there were no troubled-debt restructurings that subsequently defaulted.
J. Intangible assets - RSO
Intangible assets represent identifiable intangible assets acquired as a result of RSO’s acquisition of RCAM in February 2011, its conversion of loans to investments in real estate in June 2011, and the acquisition of real estate in August 2011.  RSO amortizes identified intangible assets to expense over their estimated lives or period of benefit using the straight-line method.  RSO evaluates intangible assets for impairment as events and circumstances change.  In October 2012, RSO purchased 66.6% of preferred equity and began consolidating Whitney CLO I, one of the RCAM CLOs. As a result of this transaction and the consolidation of Whitney CLO I, RSO wrote-off the unamortized balance of $2.6 million, the intangible asset associated with this CLO, which was recorded in gain/(loss) on consolidation in the RSO consolidated statement of income during the year ended December 31, 2012. In May 2013, RSO purchased additional equity, increasing its ownership percentage to 68.3%. Due to an event whereby a second CLO liquidated in early 2013, RSO accelerated the amortization of the remaining balance of its intangible asset and recorded a $657,000 charge to depreciation and amortization on the consolidated statement of income during the year ended December 31, 2012. RSO expects to record amortization expense on intangible assets of approximately $1.9 million for the year ended December 31, 2013, and $1.8 million for the years ended December 31, 2014, 2015, 2016 and 2017.  The weighted average amortization period was 8.5 years and 8.7 years at March 31, 2013 and December 31, 2012, respectively and the accumulated amortization was $11.0 million and $10.5 million at March 31, 2013 and December 31, 2012, respectively.


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


The following table summarizes intangible assets at March 31, 2013 and December 31, 2012 (in thousands).
 
Beginning Balance
 
Accumulated Amortization
 
Net Assets
March 31, 2013:
 
 
 
 
 
Investment in RCAM
$
21,213

 
$
(8,624
)
 
$
12,589

Investments in real estate:
 

 
 

 
 

In-place leases
2,461

 
(2,394
)
 
67

Above (below) market leases
29

 
(25
)
 
4

 
2,490

 
(2,419
)
 
71

Total intangible assets
$
23,703

 
$
(11,043
)
 
$
12,660

 
 
 
 
 
 
December 31, 2012:
 

 
 

 
 

Investment in RCAM
$
21,213

 
$
(8,108
)
 
$
13,105

Investments in real estate:
 

 
 

 
 

In-place leases
2,461

 
(2,379
)
 
82

Above (below) market leases
29

 
(24
)
 
5

 
2,490

 
(2,403
)
 
87

Total intangible assets
$
23,703

 
$
(10,511
)
 
$
13,192

For the three months ended March 31, 2013 and 2012, RSO recognized $1.4 million and $1.9 million, respectively, of fee income related to the investment in RCAM.
K. Borrowings - RSO
RSO historically has financed the acquisition of its investments, including investment securities, loans and lease receivables, through the use of secured and unsecured borrowings in the form of CDOs, securitized notes, repurchase agreements, secured term facilities, warehouse facilities and trust preferred securities issuances.  Certain information with respect to RSO’s borrowings at March 31, 2013 and December 31, 2012 is summarized in the following table (in thousands, except percentages):

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


 
Outstanding
Borrowings
 
Weighted
Average
Borrowing
Rate
 
Weighted
Average
Remaining
Maturity
 
Value of
Collateral
March 31, 2013:
 
 
 
 
 
 
 
RREF CDO 2006-1 Senior Notes (1) 
$
116,220

 
1.64%
 
33.4 years
 
$
200,401

RREF CDO 2007-1 Senior Notes (2) 
199,233

 
0.83%
 
33.5 years
 
344,963

Apidos CDO I Senior Notes (3) 
174,493

 
1.14%
 
4.3 years
 
189,304

Apidos CDO III Senior Notes (4) 
193,248

 
0.80%
 
7.2 years
 
204,281

Apidos Cinco CDO Senior Notes (5) 
320,699

 
0.80%
 
7.1 years
 
345,983

Apidos CLO VIII Senior Notes (6) 
301,606

 
2.13%
 
8.6 years
 
353,860

Apidos CLO VIII Securitized Borrowings (11)
19,576

 
15.27%
 
8.6 years
 
—

Whitney CLO I Senior Notes(10)
144,190

 
1.85%
 
3.9 years
 
164,267

     Whitney CLO I Securitized Borrowings (11)
5,749

 
9.09%
 
3.9 years
 
—

Unsecured Junior Subordinated Debentures (7)
50,861

 
4.24%
 
23.4 years
 
—

Repurchase Agreements (8)
110,365

 
2.19%
 
18 days
 
148,545

Mortgage Payable (9)
13,600

 
4.15%
 
5.3 years
 
18,100

Total
$
1,649,840

 
1.66%
 
11.9 years
 
$
1,969,704

 
 
 
 
 
 
 
 
December 31, 2012:
 

 
 
 
 
 
 

RREF CDO 2006-1 Senior Notes (1) 
$
145,664

 
1.42%
 
33.6 years
 
$
295,759

RREF CDO 2007-1 Senior Notes (2) 
225,983

 
0.81%
 
33.8 years
 
292,980

Apidos CDO I Senior Notes (3) 
202,969

 
1.07%
 
4.6 years
 
217,745

Apidos CDO III Senior Notes (4) 
221,304

 
0.80%
 
7.5 years
 
232,655

Apidos Cinco CDO Senior Notes (5) 
320,550

 
0.82%
 
7.4 years
 
344,105

Apidos CLO VIII Senior Notes (6) 
300,951

 
2.16%
 
8.8 years
 
351,014

Apidos CLO VIII Securitized Borrowings (11)
20,047

 
15.27%
 
8.8 years
 
—

Whitney CLO I Senior Notes(10)
171,555

 
1.82%
 
4.2 years
 
191,704

Whitney CLO I Securitized Borrowings (11)
5,860

 
9.50%
 
4.2 years
 
—

Unsecured Junior Subordinated Debentures (7)
50,814

 
4.26%
 
23.7 years
 
—

Repurchase Agreements (8)
106,303

 
2.28%
 
18 days
 
145,234

Mortgage Payable (9)
13,600

 
4.17%
 
5.6 years
 
18,100

Total
$
1,785,600

 
1.62%
 
12.5 years
 
$
2,089,296

 
(1)
Amount represents principal outstanding of $116.7 million and $146.4 million less unamortized issuance costs of $499,000 and $728,000 as of March 31, 2013 and December 31, 2012, respectively.  This CDO transaction closed in August 2006.
(2)
Amount represents principal outstanding of $200.4 million and $227.4 million less unamortized issuance costs of $1.1 million and $1.4 million as of March 31, 2013 and December 31, 2012, respectively.  This CDO transaction closed in June 2007.
(3)
Amount represents principal outstanding of $174.6 million and $203.2 million less unamortized issuance costs of $148,000 and $274,000 as of March 31, 2013 and December 31, 2012, respectively.  This CDO transaction closed in August 2005.
(4)
Amount represents principal outstanding of $193.7 million and $222.0 million less unamortized issuance costs of $474,000 and $659,000 as of March 31, 2013 and December 31, 2012, respectively.  This CDO transaction closed in May 2006.
(5)
Amount represents principal outstanding of $322.0 million and $322.0 million less unamortized issuance costs of $1.3 million and $1.5 million as of March 31, 2013 and December 31, 2012, respectively.  This CDO transaction closed in May 2007.
(6)
Amount represents principal outstanding of $317.6 million and $317.6 million, less unamortized issuance costs of $4.5 million and $4.7 million, and less unamortized discounts of $11.5 million and $11.9 million as of March 31, 2013 and December 31, 2012, respectively.  This CDO transaction closed in October 2011. Apidos CLO VIII was called and the notes were paid in full in October 2013.

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


(7)
Amount represents junior subordinated debentures issued to RCT I and RCT II in May 2006 and September 2006, respectively.
(8)
Amount represents principal outstanding of $44.1 million and $47.5 million less unamortized deferred debt costs of $117,000 and $23,000 plus accrued interest costs of $24,000 and $37,000 related to CMBS repurchase facilities as of March 31, 2013 and December 31, 2012, respectively, and principal outstanding of $64.4 million and $59.1 million less unamortized deferred debt costs of $219,000 and $348,000 plus accrued interest costs of $87,000 and $79,000 related to CRE repurchase facilities as of March 31, 2013 and December 31, 2012. Amount does not reflect CMBS repurchase agreement borrowings that are components of Linked Transactions. At March 31, 2013 and December 31, 2012, RSO had repurchase agreements of $53.6 million and $20.4 million, respectively, that were linked to CMBS purchases and accounted for as Linked Transactions, and, as such, the linked repurchase agreements are not included in the above table.
(9)
Amount represents principal outstanding of $13.6 million as of March 31, 2013 and December 31, 2012, respectively. This real estate transaction closed in August 2011.
(10)
Amount represents principal outstanding of $146.3 million less unamortized discounts of $2.1 million as of December 31, 2012. In September 2013, the Company called and liquidated Whitney CLO I. As a result, substantially all of the remaining assets were sold and the balance on the outstanding notes totaling $20.9 million was paid down.
(11)
The securitized borrowings are collateralized by the same assets as the Apidos CLO VIII Senior Notes and the Whitney CLO I Senior Notes, respectively.
Collateralized Debt Obligations
Resource Real Estate Funding CDO 2007-1
In June 2007, RSO closed RREF CDO 2007-1, a $500.0 million CDO transaction that provided financing for commercial real estate loans and commercial mortgage-backed securities.  The investments held by RREF CDO 2007-1 collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders.  RREF CDO 2007-1 issued a total of $265.6 million of senior notes at par to unrelated investors.  RCC Real Estate, Inc. ("RCC Real Estate"), a wholly owned subsidiary of RSO, purchased 100% of the class H senior notes (rated  BBB+:Fitch), class K senior notes (rated BBB-:Fitch), class L senior notes (rated BB:Fitch) and class M senior notes (rated B: Fitch) for $68.0 million.  In addition, Resource Real Estate Funding 2007-1 CDO Investor, LLC, a subsidiary of RCC Real Estate, purchased a $41.3 million equity interest representing 100% of the outstanding preference shares.  The senior notes purchased by RCC Real Estate are subordinated in right of payment to all other senior notes issued by RREF CDO 2007-1 but are senior in right of payment to the preference shares.  The equity interest is subordinated in right of payment to all other securities issued by RREF CDO 2007-1. The reinvestment period for RREF 2007-1 ended in June 2012 which results in the sequential pay down of notes as underlying collateral matures and pays down.  As of March 31, 2013, $41.6 million of Class A-1 notes have been paid down and $50.0 million of the class A-1R notes have been paid down.
At closing, the senior notes issued to investors by RREF CDO 2007-1 consisted of the following classes: (i) $180.0 million of class A-1 notes bearing interest at one-month LIBOR plus 0.28%; (ii) $50.0 million of unissued class A-1R notes, which allowed the CDO to fund future funding obligations under the existing whole loan participations that had future funding commitments; the undrawn balance of the class A-1R notes accrued a commitment fee at a rate per annum equal to 0.18%, the drawn balance bore interest at one-month LIBOR plus 0.32%; (iii) $57.5 million of class A-2 notes bearing interest at one-month LIBOR plus 0.46%; (iv) $22.5 million of class B notes bearing interest at one-month LIBOR plus 0.80%; (v) $7.0 million of class C notes bearing interest at a fixed rate of 6.42%; (vi) $26.8 million of class D notes bearing interest at one-month LIBOR plus 0.95%; (vii) $11.9 million of class E notes bearing interest at one-month LIBOR plus 1.15%; (viii) $11.9 million of class F notes bearing interest at one-month LIBOR plus 1.30%; (ix) $11.3 million of class G notes bearing interest at one-month LIBOR plus 1.55%; (x) $11.3 million of class H notes bearing interest at one-month LIBOR plus 2.30%; (xi) $11.3 million of class J notes bearing interest at one-month LIBOR plus 2.95%; (xii) $10.0 million of class K notes bearing interest at one-month LIBOR plus 3.25%; (xiii) $18.8 million of class L notes bearing interest at a fixed rate of 7.50% and (xiv) $28.8 million of class M notes bearing interest at a fixed rate of 8.50%.  All of the notes issued mature in September 2046, although RSO has the right to call the notes anytime after July 2017 until maturity.  The weighted average interest rate on all notes issued to outside investors and net of repurchased notes was 0.83% and 0.81% at March 31, 2013 and December 31, 2012, respectively.
There was no repurchase of notes in RREF CDO-2007-1 during the three months ended March 31, 2013.
As a result of RSO’s ownership of senior notes, both the notes repurchased subsequent to closing and those retained at the CDO’s closing eliminate in consolidation.

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


Resource Real Estate Funding CDO 2006-1
In August 2006, RSO closed RREF CDO 2006-1, a $345.0 million CDO transaction that provided financing for commercial real estate loans.  The investments held by RREF CDO 2006-1 collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders.  RREF CDO 2006-1 issued a total of $308.7 million of senior notes at par to investors of which RCC Real Estate purchased 100% of the class J senior notes (rated BB: Fitch) and 100% of the class K senior notes (rated B:Fitch) for $43.1 million.  In addition, Resource Real Estate Funding 2006-1 CDO Investor, LLC, a subsidiary of RCC Real Estate, purchased a $36.3 million equity interest representing 100% of the outstanding preference shares.  The senior notes purchased by RCC Real Estate are subordinated in right of payment to all other senior notes issued by RREF CDO 2006-1 but are senior in right of payment to the preference shares.  The equity interest is subordinated in right of payment to all other securities issued by RREF CDO 2006-1.  The reinvestment period for RREF 2006-1 ended in September 2011 which results in the sequential pay down of notes as underlying collateral matures and pays down.  As of March 31, 2013, $75.4 million of Class A-1 notes have been paid down.
At closing, the senior notes issued to investors by RREF CDO 2006-1 consisted of the following classes:  (i) $129.4 million of class A-1 notes bearing interest at one-month LIBOR plus 0.32%; (ii) $17.4 million of class A-2 notes bearing interest at one-month LIBOR plus 0.35%; (iii) $5.0 million of class A-2 notes bearing interest at a fixed rate of 5.84%; (iv) $6.9 million of class B notes bearing interest at one-month LIBOR plus 0.40%; (v) $20.7 million of class C notes bearing interest at one-month LIBOR plus 0.62%; (vi) $15.5 million of class D notes bearing interest at one-month LIBOR plus 0.80%; (vii) $20.7 million of class E notes bearing interest at one-month LIBOR plus 1.30%; (viii) $19.8 million of class F notes bearing interest at one-month LIBOR plus 1.60%; (ix) $17.3 million of class G notes bearing interest at one-month LIBOR plus 1.90%; (x) $12.9 million of class H notes bearing interest at one-month LIBOR plus 3.75%, (xi) $14.7 million of class J notes bearing interest at a fixed rate of 6.00% and (xii) $28.4 million of class K notes bearing interest at a fixed rate of 6.00%.  All of the notes issued mature in August 2046, although RSO has the right to call the notes anytime after August 2016 until maturity.  The weighted average interest rate on all notes issued to outside investors and net of repurchased notes was 1.64% and 1.42% at March 31, 2013 and December 31, 2012, respectively.
There was no repurchase of notes in RREF CDO-2006-1 during the three months ended March 31, 2013.
As a result of RSO’s ownership of senior notes, both the notes repurchased subsequent to closing and those retained at the CDO’s closing eliminate in consolidation.
Whitney CLO I
In February 2011, RSO acquired the rights to manage the assets held by Whitney CLO I. In October 2012, RSO purchased a $20.9 million preferred equity interest at a discount of 42.5% which represents 66.6% of the outstanding preference shares in Whitney CLO I. In May 2013, RSO purchased an additional $550,000 equity interest in Whitney CLO I, for a total interest of 68.3% in the outstanding preference shares. Based upon those purchases, RSO determined that it had a controlling interest and consolidated Whitney CLO I. The preferred equity interest is subordinated in right of payment to all other securities issued by Whitney CLO I. In September 2013, RSO liquidated Whitney CLO I, and as a result substantially all of the assets were sold. Total proceeds from the sale of these assets, plus proceeds from previous sales and paydowns in the CLO were used to pay down the remaining balance on the outstanding notes of $103.7 million.
The balance of senior notes issued to investors when RSO acquired a controlling interest in October 2012 were as follows: (i) $48.8 million of class A-1L notes bearing interest at LIBOR plus 0.32%; (ii) $26.5 million of class A-1LA notes bearing interest at LIBOR plus 0.29%; (iii) $36.5 million of class A-1LB notes bearing interest at LIBOR plus 0.45%; (iv) $19.8 million of class A-2F notes bearing interest at LIBOR plus 5.19%; (v) $15.0 million of class A-2L notes bearing interest at LIBOR plus 0.57%; (vi) $25.0 million of class A-3L notes bearing interest at LIBOR plus 1.05%; (vii) $23.5 million of class B-1LA notes bearing interest at LIBOR plus 2.1%; (viii) $14.4 million of class B-1LB notes bearing interest at LIBOR plus 1.00%. All of the notes issued mature on March 1, 2017. RSO has the right to call the notes anytime after March 1, 2009 until maturity in March 2017. The weighted average interest rate on all notes was 1.82% at March 31, 2013 and December 31, 2012, respectively.

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


Apidos CLO VIII
In October 2011, RSO closed Apidos CLO VIII, a $350.0 million CLO transaction that provides financing for bank loans.  The investments held by Apidos CLO VIII collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders.  Apidos CLO VIII issued a total of $317.6 million of senior notes at a discount of 4.4% to investors and RCC Commercial purchased a $15.0 million interest representing 43.0% of the outstanding subordinated debt.  The remaining 57.0% of subordinated debt is owned by unrelated third parties.  The reinvestment period for Apidos CLO VIII will end in October 2014. The subordinated debt interest is subordinated in right of payment to all other securities issued by Apidos CLO VIII.
The senior notes issued to investors by Apidos CLO VIII consist of the following classes: (i) $231.2 million of class A-1 notes bearing interest at LIBOR plus 1.5%; (ii) $35.0 million of class A-2 notes bearing interest at LIBOR plus 2.0%; (iii) $17.3 million of class B-1 notes bearing interest at LIBOR plus 2.5%; (iv) $6.8 million of class B-2 notes bearing interest at LIBOR plus 2.5%; (v) $14.1 million of class C notes bearing interest at LIBOR plus 3.1% and (vi) $13.2 million of class D notes bearing interest at LIBOR plus 4.5%. All of the notes issued mature on October 17, 2021, although RSO has the right to call the notes anytime from October 17, 2013 until maturity.  The weighted average interest rate on all notes was 2.13% and 2.16% at March 31, 2013 and December 31, 2012, respectively. In October 2013, Apidos CLO VIII was called and liquidated. Proceeds from the liquidation were used to pay the notes down in full.
Apidos Cinco CDO
In May 2007, RSO closed Apidos Cinco CDO, a $350.0 million CDO transaction that provides financing for bank loans.  The investments held by Apidos Cinco CDO collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders.  Apidos Cinco CDO issued a total of $322.0 million of senior notes at par to investors and RCC Commercial purchased a $28.0 million equity interest representing 100% of the outstanding preference shares.  The reinvestment period for Apidos Cinco CDO will end in May 2014.  The equity interest is subordinated in right of payment to all other securities issued by Apidos Cinco CDO.
The senior notes issued to investors by Apidos Cinco CDO consist of the following classes: (i) $37.5 million of class A-1 notes bearing interest at LIBOR plus 0.24%; (ii) $200.0 million of class A-2a notes bearing interest at LIBOR plus 0.23%; (iii) $22.5 million of class A-2b notes bearing interest at LIBOR plus 0.32%; (iv) $19.0 million of class A-3 notes bearing interest at LIBOR plus 0.42%; (v) $18.0 million of class B notes bearing interest at LIBOR plus 0.80%; (vi) $14.0 million of class C notes bearing interest at LIBOR plus 2.25% and (vii) $11.0 million of class D notes bearing interest at LIBOR plus 4.25%. All of the notes issued mature on May 14, 2020, although RSO has the right to call the notes anytime after May 14, 2011 until maturity.  The weighted average interest rate on all notes was 0.80% and 0.82% at March 31, 2013 and December 31, 2012, respectively.
Apidos CDO III
In May 2006, RSO closed Apidos CDO III, a $285.5 million CDO transaction that provides financing for bank loans.  The investments held by Apidos CDO III collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders.  Apidos CDO III issued a total of $262.5 million of senior notes at par to investors and RCC Commercial purchased a $23.0 million equity interest representing 100% of the outstanding preference shares. The equity interest is subordinated in right of payment to all other securities issued by Apidos CDO III.
At closing, the senior notes issued to investors by Apidos CDO III consisted of the following classes:  (i) $212.0 million of class A-1 notes bearing interest at 3-month LIBOR plus 0.26%; (ii) $19.0 million of class A-2 notes bearing interest at 3-month LIBOR plus 0.45%; (iii) $15.0 million of class B notes bearing interest at 3-month LIBOR plus 0.75%; (iv) $10.5 million of class C notes bearing interest at 3-month LIBOR plus 1.75%; and (v) $6.0 million of class D notes bearing interest at 3-month LIBOR plus 4.25%.  All of the notes issued mature on September 12, 2020, although RSO has the right to call the notes anytime after September 12, 2011 until maturity.  The weighted average interest rate on all notes was 0.80% and 0.80% at March 31, 2013 and December 31, 2012, respectively. The reinvestment period for Apidos CDO III ended in June 2012 which results in the sequential pay down of notes as underlying collateral matures and pays down.  As of March 31, 2013, $68.8 million of Class A-1 notes have been paid down.

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


Apidos CDO I
In August 2005, RSO closed Apidos CDO I, a $350.0 million CDO transaction that provides financing for bank loans.  The investments held by Apidos CDO I collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders.  Apidos CDO I issued a total of $321.5 million of senior notes at par to investors and RCC Commercial purchased a $28.5 million equity interest representing 100% of the outstanding preference shares.  The equity interest is subordinated in right of payment to all other securities issued by Apidos CDO I.
At closing, the senior notes issued to investors by Apidos CDO I consisted of the following classes:  (i) $259.5 million of class A-1 notes bearing interest at 3-month LIBOR plus 0.26%; (ii) $15.0 million of class A-2 notes bearing interest at 3-month LIBOR plus 0.42%; (iii) $20.5 million of class B notes bearing interest at 3-month LIBOR plus 0.75%; (iv) $13.0 million of class C notes bearing interest at 3-month LIBOR plus 1.85%; and (v) $8.0 million of class D notes bearing interest at a fixed rate of 9.25%.  All of the notes issued mature on July 27, 2017, although RSO has the right to call the notes anytime after July 27, 2010 until maturity.  The weighted average interest rate on all notes was 1.14% and 1.07% at March 31, 2013 and December 31, 2012, respectively. The reinvestment period for Apidos CDO I ended in July 2011 which results in the sequential pay down of notes as underlying collateral matures and pays down.  As of March 31, 2013, $144.9 million of Class A-1 Notes have been paid down.
Unsecured Junior Subordinated Debentures
In May 2006 and September 2006, RSO formed RCT I and RCT II, respectively, for the sole purpose of issuing and selling capital securities representing preferred beneficial interests.  Although RSO owns 100% of the common securities of RCT I and RCT II, RCT I and RCT II are not consolidated into RSO’s consolidated financial statements because RSO is not deemed to be the primary beneficiary of these entities.  In connection with the issuance and sale of the capital securities, RSO issued junior subordinated debentures to RCT I and RCT II of $25.8 million each, representing RSO’s maximum exposure to loss.  The debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II are included in RSO's borrowings and are being amortized into interest expense in RSO's consolidated statements of income using the effective yield method over a ten year period.
The debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II at March 31, 2013 were $334,000 and $353,000, respectively.  The debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II at December 31, 2012 were $358,000 and $377,000, respectively.  The rates for RCT I and RCT II, at March 31, 2013, were 4.23% and 4.25%, respectively.  The rates for RCT I and RCT II, at December 31, 2012, were 4.26% and 4.26%, respectively. 
The rights of holders of common securities of RCT I and RCT II are subordinate to the rights of the holders of capital securities only in the event of a default; otherwise, the common securities’ economic and voting rights are pari passu with the capital securities.  The capital and common securities of RCT I and RCT II are subject to mandatory redemption upon the maturity or call of the junior subordinated debentures held by each.  Unless earlier dissolved, RCT I will dissolve on May 25, 2041 and RCT II will dissolve on September 29, 2041.  The junior subordinated debentures are the sole assets of RCT I and RCT II, mature on September 30, 2036 and October 30, 2036, respectively, and may be called at par by RSO any time after September 30, 2011 and October 30, 2011, respectively.  RSO records its investments in RCT I and RCT II’s common securities of $774,000 each as investments in unconsolidated trusts and records dividend income upon declaration by RCT I and RCT II.

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


Repurchase and Credit Facilities
CMBS – Term Repurchase Facility
In February 2011, the registrant's wholly-owned subsidiaries, RCC Commercial Inc. and RCC Real Estate, Inc.(collectively, the "RSO Subsidiaries"), entered into a master repurchase and securities contract (the “2011 Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”).  Under the 2011 Facility, from time to time, the parties may enter into transactions in which the RSO Subsidiaries and Wells Fargo agree to transfer from the RSO Subsidiaries to Wells Fargo all of their right, title and interest to certain commercial mortgage backed securities and other assets (the “Assets”) against the transfer of funds by Wells Fargo to the RSO Subsidiaries, with a simultaneous agreement by Wells Fargo to transfer back to the RSO Subsidiaries such Assets at a date certain or on demand, against the transfer of funds from the RSO Subsidiaries to Wells Fargo.  The maximum amount of the Facility is $100.0 million which has a two year term with a one year option to extend, and an interest rate equal to the one-month LIBOR plus 1.29% plus a .25% initial structuring fee and a .25% extension fee upon exercise. On February 1, 2013, RSO exercised the option to extend the 2011 Facility to January 31, 2014 and negotiated another one year option to extend to January 31, 2015. The RSO Subsidiaries may enter into interest rate swaps and cap agreements for securities whose average life exceeds two years to mitigate interest rate risk under the 2011 Facility.
The 2011 Facility contains customary events of default, including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, and the institution of bankruptcy or insolvency proceedings that remain unstayed.  The remedies for such events of default are also customary for this type of transaction and include the acceleration of all obligations of the RSO Subsidiaries to repay the purchase price for purchased assets.
 The 2011 Facility also contains margin call provisions relating to a decline in the market value of a security. Under these circumstances, Wells Fargo may require the RSO Subsidiaries to transfer cash in an amount sufficient to eliminate any margin deficit resulting from such a decline.
 Under the terms of the 2011 Facility and pursuant to a guarantee agreement dated February 1, 2011 (the “ 2011 Guaranty”), RSO agreed to unconditionally and irrevocably guarantee to Wells Fargo the prompt and complete payment and performance of (a) all payment obligations owing by the RSO Subsidiaries to Wells Fargo under or in connection with the Facility and any other governing agreements and any and all extensions, renewals, modifications, amendments or substitutions of the foregoing; (b) all expenses, including, without limitation, reasonable attorneys' fees and disbursements, that are incurred by Wells Fargo in the enforcement of any of the foregoing or any obligation of the registrant; and (c) any other obligations of the RSO Subsidiaries with respect to Wells Fargo under each of the governing documents.  The 2011 Guaranty  includes covenants that, among other things, limit RSO's leverage and debt service ratios and require maintenance of certain levels of cash and net worth. RCC Real Estate and RCC Commercial were in compliance with all debt covenants as of March 31, 2013.
At March 31, 2013, RCC Real Estate and RCC Commercial had borrowed $44.1 million (net of $117,000 of deferred debt issuance costs), all of which the RSO Subsidiaries had guaranteed.  At March 31, 2013, borrowings under the repurchase agreement were secured by highly-rated CMBS with an estimated fair value of $52.3 million and a weighted average interest rate of one-month LIBOR plus 1.30%, or 1.48%.  At December 31, 2012, RCC Real Estate had borrowed $42.5 million (net of $23,000 of deferred debt issuance costs), all of which the RSO subsidiaries had guaranteed.  At December 31, 2012, borrowings under the repurchase agreement were secured by highly-rated CMBS with an estimated fair value of $51.4 million and a weighted average interest rate of one-month LIBOR plus 1.30%, or 1.53%. At March 31, 2013 and December 31, 2012, RSO also had repurchase agreements of $15.7 million and $20.4 million, respectively that were linked to CMBS purchases and accounted for as Linked Transactions, and as such, the linked repurchase agreements are not included in the borrowings table. At December 31, 2012, RSO also had repurchase agreements of $12.2 million, with a weighted average interest rate of one-month LIBOR plus 1.42% or 1.60%, respectively. The borrowings under the repurchase agreement were secured by highly-rated CMBS with an estimated fair value of $14.6 million as of December 31, 2012.

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


The following table shows information about the amount at risk under this facility (dollars in thousands):
 
Amount at
Risk (1)
 
Weighted
Average
Maturity in Days
 
Weighted
Average
Interest Rate
March 31, 2013:
 
 
 
 
 
Wells Fargo Bank, National Association (2)
$
10,345

 
18
 
1.48
%
 
 
 
 
 
 
December 31, 2012:
 

 
 
 
 

Wells Fargo Bank, National Association (2)
$
10,722

 
18
 
1.53
%
 
(1)
Equal to the estimated fair value of securities or loans sold, plus accrued interest income, minus the sum of repurchase agreement liabilities plus accrued interest expense.
(2)
$13.3 million and $12.2 million of linked repurchase agreement borrowings are being included as derivative instruments as of March 31, 2013 and December 31, 2012, respectively.
CRE – Term Repurchase Facilities
On February 27, 2012, RCC Real Estate entered into a master repurchase and securities agreement (the "2012 Facility") with Wells Fargo to finance the origination of commercial real estate loans.  The 2012 facility had a maximum amount of $150.0 million and an initial 18 month term with two one year options to extend.  RSO paid an origination fee of 37.5 basis points (0.375)%.  RSO guaranteed RCC Real Estate’s performance of its obligations under the 2012 Facility.  On April 2, 2013, RCC Real Estate entered into an amendment which increased the size to $250.0 million and extended the current term of the 2012 Facility to February of 2015 and provides two additional one year extension options at RSO's discretion. RCC Real Estate paid an additional structuring fee of $101,000 and an extension fee of $938,000 in connection with the amendment and will amortize the additional fees over the term of the extension. At March 31, 2013, RCC Real Estate had borrowed $64.1 million (net of $219,000 of deferred debt issuance costs), all of which RSO had guaranteed.  At March 31, 2013, borrowings under the 2012 Facility were secured by several commercial real estate loans with an estimated fair value of $93.1 million and a weighted average interest rate of one-month LIBOR plus 2.50%, or 2.70%. At December 31, 2012, RCC Real Estate had borrowed $58.8 million (net of $348,000 of deferred debt issuance costs), all of which RSO had guaranteed.  At December 31, 2012, borrowings under the 2012 Facility were secured by several commercial real estate loans with an estimated fair value of $85.4 million and a weighted average interest rate of one-month LIBOR plus 2.67%, or 2.88%.
This 2012 Facility contains customary events of default, including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, and the institution of bankruptcy or insolvency proceedings that remain unstayed.  The remedies for such events of default are also customary for this type of transaction and include the acceleration of all obligations of RSO to repay the purchase price for purchased assets.
 The 2012 Facility also contains margin call provisions relating to a decline in the market value of a security. Under these circumstances, Wells Fargo may require RSO to transfer cash in an amount sufficient to eliminate any margin deficit resulting from such a decline.
 Under the terms of the 2012 Facility and pursuant to a guarantee agreement dated February 27, 2012 (the “2012 Guaranty”), RSO agreed to unconditionally and irrevocably guarantee to Wells Fargo the prompt and complete payment and performance of (a) all payment obligations owing by the RSO Companies to Wells Fargo under or in connection with the 2012 Facility and any other governing agreements and any and all extensions, renewals, modifications, amendments or substitutions of the foregoing; (b) all expenses, including, without limitation, reasonable attorneys' fees and disbursements, that are incurred by Wells Fargo in the enforcement of any of the foregoing or any obligation of the registrant; and (c) any other obligations of RSO with respect to Wells Fargo under each of the governing documents.  The 2012 Guaranty  includes covenants that, among other things, limit the registrant's leverage and debt service ratios and require maintenance of certain levels of cash and net worth. RCC Real Estate was in compliance with all debt covenants as of March 31, 2013.

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


The following table shows information about the amount at risk under the facility (dollars in thousands);
 
Amount at
Risk (1)
 
Weighted
Average
Maturity in Days
 
Weighted
Average
Interest Rate
March 31, 2013:
 
 
 
 
 
Wells Fargo Bank, National Association
$
28,831

 
18
 
2.70
%
 
 
 
 
 
 
December 31, 2012:
 

 
 
 
 

Wells Fargo Bank, National Association
$
26,332

 
18
 
2.88
%
 
(1)
Equal to the estimated fair value of securities or loans sold, plus accrued interest income, minus the sum of repurchase agreement liabilities plus accrued interest expense.
On July 19, 2013, RCC Real Estate's wholly owned subsidiary, RCC Real Estate SPE 5 ("SPE 5") entered into a master repurchase and securities agreement (the "DB Facility") with Deutsche Bank AG, Cayman Islands Branch ("DB") to finance the origination of commercial real estate loans.  The DB Facility has a maximum amount of $200 million and an initial 12 month term with two one-year extensions at the option of SPE 5 and subject further to the right of SPE 5 to repurchase the assets held in the facility earlier. RSO paid a structuring fee of 0.25% of the maximum facility amount, as well as other reasonable closing costs. RSO guaranteed SPE 5's performance of its obligations under the DB Facility.
The DB Facility contains provisions that provide DB with certain rights if certain credit events have occurred with respect to one or more assets financed on the DB Facility to either repay a portion of the advance on such asset(s) or repay such advance in full (by repurchase of such asset(s). Depending on the nature of the credit event, such repayment may be required notwithstanding the availability of interest and principal payments from assets financed on the DB Facility, or may only be required to the extent of the availability of such payments.
The DB Facility contains events of default (subject to certain materiality thresholds and grace periods) customary for this type of financing arrangement, including but not limited to: payment defaults; bankruptcy or insolvency proceedings; a change of control of SPE 5 or RSO; breaches of covenants and/or certain representations and warranties; performance defaults by RSO; a judgment in an amount greater than $100,000 against SPE 5 or $5,000,000 in the aggregate against RSO; or a default involving the failure to pay or acceleration of a monetary obligation in excess of $100,000 of SPE 5 or $5.0 million of RSO. The remedies for such events of default are also customary for this type of transaction and include the acceleration of the principal amount outstanding under the DB Facility and the liquidation by DB of assets then subject to the DB Facility.
RSO was in compliance with all debt covenants as of March 31, 2013.
CRE - Repurchase Facility
On March 8, 2005, the Company entered into a master repurchase and securities agreement with Deutsche Bank Securities Inc. to finance the origination of commercial real estate loans. The Company guaranteed RCC Real Estate's performance of its obligations under the repurchase agreement. There is no stated maximum amount of the facility and the repurchase agreement has an initial 12 month term with monthly resets of one-month LIBOR plus 3.25%.   The Company had repaid all borrowings under this agreement as of March 31, 2013.

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


Short-Term Repurchase Agreements
On November 6, 2012, RSO entered into a master repurchase and securities agreement with JP Morgan Securities LLC to finance the origination of CMBS.  There is no stated maximum amount of the facility and the repurchase agreement has no stated maturity with monthly resets of interest rates.  At March 31, 2013, RCC Real Estate had borrowed $13.5 million, all of which RSO had guaranteed. At March 31. 2013, borrowings under the repurchase agreement were secured by a CMBS bond with an estimated fair value of $20.2 million and a weighted average interest rate of one-month LIBOR plus 0.86%, or 1.07%.  At December 31, 2012, RCC Real Estate had borrowed $4.7 million, all of which RSO had guaranteed, that were linked to CMBS purchases and accounted for as Linked Transactions, and as such, the linked repurchase agreements are not included in the borrowings table.  At December 31, 2012, borrowings under the repurchase agreement were secured by a CMBS bond with an estimated fair value of $7.2 million and a weighted average interest rate of one-month LIBOR plus 0.80%, or 1.01%. 
The following table shows information about the amount at risk under this facility (dollars in thousands):
 
Amount at
Risk (1)
 
Weighted
Average
Maturity in Days
 
Weighted
Average
Interest Rate
March 31, 2013
 
 
 
 
 
JP Morgan Securities, LLC (2)
$
6,965

 
12
 
1.07
%
 
 
 
 
 
 
December 31, 2012:
 
 
 
 
 
JP Morgan Securities, LLC (2)
$
2,544

 
11
 
1.01
%
 
(1)
Equal to the estimated fair value of securities or loans sold, plus accrued interest income, minus the sum of repurchase agreement liabilities plus accrued interest expense.
(2)
$13.5 million and $4.7 million linked repurchase agreement borrowings are being included as derivative instruments as of March 31, 2013 and December 31, 2012.
On February 14, 2012, RCC Real Estate entered into a master repurchase and securities agreement with Wells Fargo Securities, LLC to finance the origination of CMBS.  There is no stated maximum amount of the facility and the repurchase agreement has no stated maturity date with monthly resets of interest rates.  RSO guaranteed RCC Real Estate’s performance of its obligations under the repurchase agreement.  At March 31, 2013, RCC Real Estate had borrowed $19.0 million, all of which RSO had guaranteed.  At March 31, 2013, borrowings under the repurchase agreement were secured by seven CMBS bond with an estimated fair value of $27.4 million and a weighted average interest rate of one-month LIBOR plus 1.05%, or 1.25%. At December 31, 2012, RCC Real Estate had borrowed $5.4 million, all of which RSO had guaranteed.  At December 31, 2012, borrowings under the repurchase agreement were secured by two CMBS bonds with an estimated fair value of $8.5 million and a weighted average interest rate of one-month LIBOR plus 1.25%, or 1.46%.
The following table shows information about the amount at risk under this facility (dollars in thousands);
 
Amount at
Risk (1)
 
Weighted
Average
Maturity in Days
 
Weighted
Average
Interest Rate
March 31, 2013
 
 
 
 
 
Wells Fargo Securities, LLC (2)
$
8,837

 
1
 
1.25
%
 
 
 
 
 
 
December 31, 2012:
 
 
 
 
 
Wells Fargo Securities, LLC (2)
$
1,956

 
28
 
1.46
%
 
(1)
Equal to the estimated fair value of securities or loans sold, plus accrued interest income, minus the sum of repurchase agreement liabilities plus accrued interest expense.
(2)
$16.8 million and $3.5 million of linked repurchase agreement borrowings are being included as derivative instruments as of March 31, 2013 and December 31, 2012.     

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


On March 8, 2005, RCC Real Estate entered into a master repurchase and securities agreement with Deutsche Bank Securities Inc. to finance the origination of CMBS and commercial real estate loans.  There is no stated maximum amount of the facility and the repurchase agreement has an initial 12 month term with monthly resets of interest rates.  RSO guaranteed RCC Real Estate’s performance of its obligations under the repurchase agreement.   At March 31, 2013, RCC Real Estate had borrowed $9.9 million, all of which RSO had guaranteed, that were linked to CMBS purchases and accounted for as Linked Transactions, and as such, the linked repurchase agreements are not included in the borrowings table.  At March 31, 2013, borrowings under the repurchase agreement were secured by a CMBS bond with an estimated fair value of $15.2 million and a weighted average interest rate of one-month LIBOR plus 1.08%, or 1.28%.  At December 31, 2012, RCC Real Estate had borrowed $3.1 million, all of which RSO had guaranteed, that were linked to CMBS purchases and accounted for as Linked Transactions, and as such, the linked repurchase agreements are not included in the borrowings table.  At December 31, 2012, borrowings under the repurchase agreement were secured by a CMBS bond with an estimated fair value of $5.1 million and a weighted average interest rate of one-month LIBOR plus 1.25%, or 1.46%. 
The following table shows information about the amount at risk under this facility (dollars in thousands);
 
Amount at
Risk (1)
 
Weighted
Average
Maturity in Days
 
Weighted
Average
Interest Rate
March 31, 2013:
 
 
 
 
 
Deutsche Bank Securities, Inc.
$
5,360

 
15
 
1.28
%
 
 
 
 
 
 
December 31, 2012:
 
 
 
 
 
Deutsche Bank Securities, Inc.
$
2,069

 
7
 
1.46
%
 
(1)
Equal to the estimated fair value of securities or loans sold, plus accrued interest income, minus the sum of repurchase agreement liabilities plus accrued interest expense.
Mortgage Payable
On August 1, 2011, RSO, through RCC Real Estate, purchased Whispertree Apartments, a 504 unit multi-family property located in Houston, Texas, for $18.1 million.  The property was 95% occupied at acquisition.  In conjunction with the purchase of the property, RSO entered into a seven year mortgage of $13.6 million with a lender.  The mortgage bears interest at a rate of one-month LIBOR plus 3.95%.  As of March 31, 2013 and December 31, 2012, the borrowing rate was 4.15% and 4.17%.
L. Related party transactions - RSO
Relationship with LEAF.  LEAF originates and manages equipment leases and notes on behalf of RSO.
On March 5, 2010, RSO entered into agreements with Lease Equity Appreciation Fund II, L.P. (“LEAF II”) (an equipment leasing partnership sponsored by LEAF Financial and of which a LEAF Financial subsidiary is the general partner), pursuant to which RSO provided and funded an $8.0 million credit facility to LEAF II.  The credit facility initially had a one year term at 12% per year, payable quarterly, and was secured by all the assets of LEAF II including its entire ownership interest in LEAF II Receivables Funding.  RSO received a 1% origination fee in connection with establishing the facility.  The facility originally matured on March 3, 2011 and was extended until September 3, 2011 with a 1% extension fee paid on the outstanding loan balance.  On June 3, 2011, RSO entered into an amendment to extend the maturity to February 15, 2012 and decrease the interest rate from 12% to 10% per annum resulting in a troubled-debt restructuring under current accounting guidance.  On February 15, 2012, the credit facility was further amended to extend the maturity to February 15, 2013 with a 1% extension fee accrued and added to the amount outstanding.  On January 11, 2013, RSO entered into another amendment to extend the maturity to February 15, 2014 with an additional 1% extension fee accrued and added to the amount outstanding. The loan is current and performing with balances outstanding at March 31, 2013 and December 31, 2012 of $6.3 million and $6.8 million, respectively.

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


Relationship with CVC Credit Partners. On February 24, 2011, a subsidiary of RSO purchased 100% of the ownership interests in Churchill Pacific Asset Management LLC ("CPAM") from Churchill Financial Holdings LLC for $22.5 million.  CPAM subsequently changed its name to RCAM. Through RCAM, RSO is entitled to collect senior, subordinated and incentive fees related to five CLO holdings of approximately $1.9 billion in assets managed by RCAM.  RCAM is assisted by CVC Credit Partners in managing the five CLOs.   CVC Credit Partners is entitled to 10% of all subordinated fees and 50% of the incentive fees received by RCAM.  For the three months ended March 31, 2013 and 2012, CVC Credit Partners earned subordinated fees of $181,000 and $207,000, respectively. In October 2012, RSO purchased 66.6% of the preferred equity in one of the RCAM CLOs. In May 2013, RSO purchased additional equity in this CLO, increasing its ownership percentage to 68.3%. In September 2013, this CLO was called and the notes were paid down in full. Another RCAM-managed CLO also elected to redeem its outstanding notes in whole earlier this year in February 2013.
Relationship with Resource Real Estate. On June 21, 2011, RSO entered into a joint venture with an unaffiliated third party to form CR SLH Partners, L.P. (“SLH Partners”) to purchase a defaulted promissory note secured by a mortgage on a multi-family apartment building.  RSO purchased a 10% equity interest in the venture and also loaned SLH Partners $7.0 million to finance the project secured by a first mortgage lien on the property. On May 23, 2012, SLH Partners repaid the $7.0 million loan in its entirety.  The loan had a maturity date of September 21, 2012 and bore interest at a fixed rate of 10.0% per annum on the unpaid principal balance, payable monthly.   RSO received a commitment fee equal to 1.0% of the loan amount at the origination of the loan and received a $70,000 exit fee upon repayment.  RREM was appointed as the asset manager of the venture.  RREM performs lease review and approval, debt service collection, loan workout, foreclosure, disposition and permitting, as applicable.  RREM is also responsible for engaging third parties to perform day-to-day property management, property leasing, rent collection, maintenance, and capital improvements.  RREM receives an annual asset management fee equal to 2.0% of the gross receipts generated from the property.  RSO held a $1.3 million and $1.2 million preferred equity investment in SLH Partners as of March 31, 2013 and December 31, 2012, respectively.
Relationship with TBBK.  Walter Beach, a director of TBBK since 1999, has also served as a director of RSO since March 2005. On July 7, 2011, RSO and RCC Real Estate entered into a $10.0 million revolving credit facility with Bancorp.  The note matured on June 30, 2012 and was not renewed. There were no outstanding borrowings as of March 31, 2013 or December 31, 2012.
Relationship with Ledgewood.  Until 1996, Edward E. Cohen, a director who was RSO’s Chairman from its inception until November 2009, was of counsel to Ledgewood, P.C., a law firm.  In addition, one of RSO’s executive officers, Jeffrey F. Brotman, was employed by Ledgewood until 2007.  Mr. E. Cohen receives certain debt service payments from Ledgewood related to the termination of his affiliation with Ledgewood and its redemption of his interest in the firm.  Mr. Brotman also receives certain debt service payments from Ledgewood related to the termination of his affiliation with the firm.  For the three months ended March 31, 2013 and 2012, RSO paid Ledgewood $46,000 and $33,000, respectively, in connection with legal services rendered to RSO.
M. Fair value of financial instruments - RSO
In analyzing the fair value of its investments accounted for on a fair value basis, RSO 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.  RSO determines fair value based on quoted prices when available or, if quoted prices are not available, through the use of alternative approaches, such as using third party valuation firms or discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment.  The hierarchy followed defines three levels of inputs that may be used to measure fair value:
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 - Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
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 are consequently not based on market activity, but rather through particular valuation techniques.

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


The determination of where an asset or liability falls in the hierarchy requires significant judgment.  RSO evaluates its hierarchy disclosures each quarter; depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter.  However, RSO expects that changes in classifications between levels will be rare.
Certain assets and liabilities are measured at fair value on a recurring basis.  The following is a discussion of these assets and liabilities as well as the valuation techniques applied to each for fair value measurement.
RSO reports its investment securities available-for-sale at fair value.  To determine fair value, RSO uses an independent third-party valuation firm utilizing market color as well as appropriate prepayment, default, and recovery rates.  These valuations are validated utilizing dealer quotes or bids. If there is a material difference between the value indicated by the third-party valuation firm and the dealer quote or bid, RSO will evaluate the difference which could result in an updated valuation from the third party or a revised dealer quote. Based on the market color available for each position, RSO categorizes these investments as either Level 2 or Level 3 in the fair value hierarchy.
RSO reports its investment securities, trading at fair value, based on an independent third-party valuation.  RSO evaluates the reasonableness of the valuation it receives by using a dealer quote.  If there is a material difference between the value indicated by the third party and a quote RSO receives, RSO will evaluate the difference.  Any changes in fair value are recorded on RSO’s results of operations as net unrealized (loss) gain on investment securities, trading.
The CMBS underlying RSO’s Linked Transactions are valued using the same techniques as those used for RSO’s other CMBS. The value of the underlying CMBS is then netted against the carrying amount (which approximates fair value) of the repurchase agreement borrowing at the valuation date. The fair value of Linked Transactions also includes accrued interest receivable on the CMBS and accrued interest payable on the underlying repurchase agreement borrowings. RSO’s Linked Transactions are classified as Level 2 or Level 3 in the fair value hierarchy.
Derivatives (interest rate swaps and interest rate caps), both assets and liabilities, are reported at fair value, and are valued by a third-party pricing agent using an income approach with models that use, as their primary inputs, readily observable market parameters.  This valuation process considers factors including interest rate yield curves, time value, credit factors and volatility factors.  Although RSO has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by RSO and its counterparties.  RSO assesses the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and, if material, categorizes those derivatives within Level 3 of the fair value hierarchy.
The following table presents information about RSO’s assets (including derivatives that are presented net) measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized by RSO to determine such fair value as follows (in thousands):

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


   
Level 1
 
Level 2
 
Level 3
 
Total
March 31, 2013:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investment securities, trading
$
—

 
$
—

 
$
32,892

 
$
32,892

Investment securities available-for-sale
11,397

 
113,378

 
117,507

 
242,282

CMBS - linked transactions
—

 
10,808

 
11,647

 
22,455

Total assets at fair value
$
11,397

 
$
124,186

 
$
162,046

 
$
297,629

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Derivatives (net)
$
—

 
$
558

 
$
13,478

 
$
14,036

Total liabilities at fair value
$
—

 
$
558

 
$
13,478

 
$
14,036

 
 
 
 
 
 
 
 
December 31, 2012:
 

 
 

 
 

 
 

Assets:
 

 
 

 
 

 
 

Investment securities, trading
$
—

 
$
—

 
$
24,843

 
$
24,843

Investment securities available-for-sale
9,757

 
132,561

 
89,272

 
231,590

CMBS - linked transactions
—

 
4,802

 
2,033

 
6,835

Total assets at fair value
$
9,757

 
$
137,363

 
$
116,148

 
$
263,268

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Derivatives (net)
$
—

 
$
610

 
$
14,077

 
$
14,687

Total liabilities at fair value
$
—

 
$
610

 
$
14,077

 
$
14,687

The following table presents additional information about assets which are measured at fair value on a recurring basis for which RSO has utilized Level 3 inputs (in thousands):
 
Level 3
Beginning balance, January 1, 2013
$
116,148

Total gains or losses (realized/unrealized):
 

Included in earnings
1,564

Purchases
46,980

Sales
(3,249
)
Paydowns
(1,632
)
Unrealized gains (losses) – included in accumulated other comprehensive income
2,235

Transfers from level 2
—

Ending balance, March 31, 2013
$
162,046

The following table presents additional information about liabilities which are measured at fair value on a recurring basis for which RSO has utilized Level 3 inputs (in thousands):
 
Level 3
Beginning balance, January 1, 2013                                                                                            
$
14,077

Unrealized gains – included in accumulated other comprehensive income
(599
)
Ending balance, March 31, 2013                                                                                            
$
13,478

RSO had $21,000 and $139,000 of impairment losses included in earnings due to the other-than-temporary impairment charges on one asset during each of the three months ended March 31, 2013 and 2012, respectively. These losses are included in the RSO consolidated statements of income as net impairment losses recognized in earnings.

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


Loans held for sale consist of bank loans and commercial real estate loans (“CRE loans”) identified for sale due to credit concerns.  Interest on loans held for sale is recognized according to the contractual terms of the loan and included in RSO's interest income on loans.  The fair value of bank loans held for sale and impaired bank loans is based on what secondary markets are currently offering for these loans.  As such, RSO classifies these loans as nonrecurring Level 2.  For RSO’s CRE loans where there is no primary market, fair value is measured using discounted cash flow analysis and other valuation techniques and these loans are classified as nonrecurring Level 3. The amount of nonrecurring fair value losses for impaired loans for both the three months ended March 31, 2013 and 2012 was $1.3 million and is included in RSO's consolidated statements of income as provision for loan losses.
The following table summarizes the financial assets and liabilities measured at fair value on a nonrecurring basis and indicates the fair value hierarchy of the valuation techniques utilized by RSO to determine such fair value as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
March 31, 2013:
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Loans held for sale
$
—

 
$
18,150

 
$
—

 
$
18,150

Total assets at fair value
$
—

 
$
18,150

 
$
—

 
$
18,150

 
 
 
 
 
 
 
 
December 31, 2012:
 

 
 

 
 

 
 

Assets:
 

 
 

 
 

 
 

Loans held for sale
$
—

 
$
14,894

 
$
34,000

 
$
48,894

Impaired loans
—

 
4,366

 
21,000

 
25,366

Total assets at fair value
$
—

 
$
19,260

 
$
55,000

 
$
74,260

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2013, the significant unobservable inputs used in the fair value measurements were as follows (in thousands):
 
Fair Value at
March 31, 2013
 
Valuation Technique
 
Significant Unobservable Inputs
 
Significant
Unobservable
Input Value
Interest rate swap agreements
$
(14,036
)
 
Discounted cash flow
 
Weighted average credit spreads
 
5.01%
RSO is required to disclose the fair value of financial instruments for which it is practicable to estimate that value.  The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, principal paydown receivable, interest receivable, distribution payable and accrued interest expense approximates their carrying value on RSO's consolidated balance sheet.  
The fair value of RSO's Level 2 loans held-for-investment was primarily measured using a third-party pricing service.  The fair value of RSO’s Level 3 loans held-for-investment was measured by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Loans receivable-related party are estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
CDO notes are valued using the dealer quotes, typically the dealer who underwrote the CDO in which the notes are held.
Junior subordinated notes are estimated by obtaining quoted prices for similar assets in active markets.

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


The fair values of RSO’s remaining financial instruments that are not reported at fair value on the RSO consolidated balance sheets are reported below (in thousands):
 
 
 
Fair Value Measurements
 
Carrying Amount
 
Fair Value
 
Quoted Prices
in Active Markets
for Identical
Assets of Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
March 31, 2013:
 
 
 
 
 
 
 
 
 
Loans held-for-investment
$
1,708,540

 
$
1,728,878

 
$
—

 
$
1,086,102

 
$
642,776

Loans receivable-related party
$
7,860

 
$
7,860

 
$
—

 
$
—

 
$
7,860

CDO notes
$
1,475,014

 
$
1,295,372

 
$
—

 
$
1,295,372

 
$
—

Junior subordinated notes
$
50,861

 
$
17,355

 
$
—

 
$
—

 
$
17,355

Repurchase agreement
$
110,365

 
$
110,365

 
$
—

 
$
—

 
$
110,365

 
 
 
 
 
 
 
 
 
 
December 31, 2012:
 

 
 

 
 

 
 

 
 

Loans held-for-investment
$
1,793,780

 
$
1,848,617

 
$
—

 
$
1,186,642

 
$
661,975

Loans receivable-related party
$
8,324

 
$
8,324

 
$
—

 
$
—

 
$
8,324

CDO notes
$
1,614,883

 
$
1,405,124

 
$
—

 
$
1,405,124

 
$
—

Junior subordinated notes
$
50,814

 
$
17,308

 
$
—

 
$
—

 
$
17,308

Repurchase agreement
$
106,303

 
$
106,303

 
$
—

 
$
—

 
$
106,303


NOTE 19 – SUBSEQUENT EVENTS
In October 2013, RSO closed and issued $115.0 million aggregate principal amount of its 6% convertible senior notes due 2018, which included an additional $15.0 million aggregate principal amount of the notes to cover over-allotments. RSO received net proceeds of approximately $111.1 million after payment of underwriting discounts and commissions and other offering expenses.
RSO's consolidated CLO Apidos VIII’s non-call period ended on October 17, 2013, at which time all assets were liquidated and all outstanding notes were paid off.
On October 31, 2013, RSO, through RCC Residential, Inc., its newly-formed taxable REIT subsidiary, acquired a residential mortgage origination company, Primary Capital Advisors LC, an Atlanta based firm, for $8.4 million; consisting of $7.6 million in cash and $800,000 in shares of RSO common stock. Of this $7.6 million cash consideration, $1.8 million was set aside in an escrow account as a contingency for potential purchase price adjustments.
The Company has evaluated subsequent events through the filing of this form and determined that there have not been any events that have occurred that would require adjustments to the consolidated financial statements.



ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
On September 19, 2013, our Audit Committee of the Board of Directors concluded that it was necessary to restate the audited financial statements set forth in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012 and the unaudited financial statements in our Quarterly Reports on Form 10-Q for each of the quarters ended December 31, 2012, March 31, 2013 and June 30, 2013 to consolidate Resource Capital Corp. (NYSE: RSO), or RSO, which the Company previously treated as an unconsolidated variable interest entity. We also determined to change our fiscal year end from September 30th to December 31st to conform to the fiscal year of RSO. Accordingly, we filed an amended Quarterly Report on Form 10Q-T which reflects the restated unaudited consolidated balance sheet as of December 31, 2012.
The impact of the consolidation is significant to the presentation of our financial statements but is not material to our financial condition or net cash flows. See Note 2, “Restatement,” and Note 18, “Variable Interest Entities” of the notes to our consolidated financial statements in Item 1 of this report.
In management’s discussion and analysis that follows, we analyze the Resource America operations by its three business segments: Real Estate, Financial Fund Management, and Commercial Finance. Each of our operating segments earns fees for acquiring, managing, and/or financing certain assets on behalf of RSO, for which we receive payment. These revenues are included in the tables that follow and then eliminated in order to reflect the consolidation of RSO for accounting purposes.
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 for $100,000.
In January 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, 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.


In our financial fund management segment, our recent focus has primarily been the sponsorship and management of collateralized debt and loan obligation issuers, or CDOs and CLOs. 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 (a) $25.0 million in cash before transaction costs, (b) 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, and (c) we retained a preferred equity interest 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 2012. Through this joint venture, we have closed four CLOs (total of approximately $1.8 billion par value) since its formation last year. In September 2013, CVC Credit Partners completed a public offering of Credit Partners European Opportunities Limited, an investment vehicle providing investors access to the sub-investment grade European debt markets. The offering raised €174.7 million and £150.8 million before transaction fees and expenses. Euro denominated shares will trade under the symbol "CCPE" and Sterling denominated shares will trade under the symbol "CCPG" on the London Stock Exchange.
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 during the three 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.    
We recorded consolidated net income attributable to common shareholders of $496,000 for the three months ended March 31, 2013.

Presentation of Managements’ Discussion and Analysis of Financial Condition and Results of Operations.

Our financial statements have been prepared to consolidate the financial statements of RSO. Our operating segments manage assets on behalf of RSO and the compensation we earn under the terms of our management agreement with RSO is allocated across our operating segments in proportion to the management services each segment provides to RSO.

The impact of consolidation is significant to the presentation of our financial statements, but not to our financial condition or results of operations. The assets of RSO are held solely to satisfy RSO’s obligations and the creditors of RSO have no recourse to us. Our rights to the benefits of RSO are limited to the management compensation and expense reimbursements we receive and our risks associated with being an investor in RSO are limited to our 2.2% ownership position.

The operating results and the discussion that follows the description of each of our operating segments is presented before the consolidation of RSO to appropriately reflect the manner in which we conduct our operations. Management believes that excluding the fees earned by us under the terms of the management agreement with RSO that are eliminated upon consolidation may impact a reader’s analysis and understanding of our results of operations.

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,
 
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 values 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, including an increase of 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)
Due to the LEAF deconsolidation in November 2011, we no longer have 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
 
March 31,
 
2013
 
2012
 
(Restated)
 
(Restated)
Fund management revenues (1) 
$
7,968

 
$
9,397

Finance and rental revenues (2) 
2,005

 
1,986

RSO management fees (3)
2,574

 
3,376

Gains on sale of investments (4) 
1,606

 
—

Other revenues (5) 
1,296

 
21

 
15,449

 
14,780

Revenues from consolidated VIE - RSO
30,578

 
28,726

Elimination of consolidated revenues attributed to operating segments
(2,700
)
 
(3,510
)
 
$
43,327

 
$
39,996

 
(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 and revenues from certain real estate assets.
(3)
Reflects the various management fees that are received by our operating segments acquiring, managing, and financing the assets of RSO. These fees are eliminated in reporting the consolidated results of Resource America including RSO.
(4)
Includes the resolution of loans we hold in our real estate segment.
(5)
Includes primarily gains (losses) on trading securities.
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 2013, depends 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
 
March 31,
 
2013
 
2012
Revenues:
 
 
 
Management fees:
 
 
 
Asset management fees
$
2,594

 
$
1,847

Resource Residential property management fees
2,233

 
1,570

RSO management fees
2,193

 
2,007

 
7,020

 
5,424

Other:
 

 
 

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

 
946

Master lease revenues
1,056

 
1,040

Fee income from sponsorship of investment entities
689

 
2,271

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

 
—

Equity in earnings of unconsolidated entities
20

 
35

 
$
11,340

 
$
9,716

Costs and expenses:
 

 
 

General and administrative expenses
$
4,693

 
$
3,760

Resource Residential property management expenses
2,355

 
1,748

Master lease expenses
1,579

 
1,042

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

 
857

 
$
9,440

 
$
7,407

 
(1)
We generally consolidate a variable interest entity, or VIE, when we are deemed to be the primary beneficiary of the entity. The real estate VIE was deconsolidated upon the sale of the property underlying our interest in the entity.
Revenues − Three Months Ended March 31, 2013 as Compared to Three Months Ended March 31, 2012
Revenues from our real estate operations increased $1.6 million for the three months ended March 31, 2013.  We attribute the increases primarily to the following:
Management fees - increased by $1.6 million, principally due to the following:
•
a $747,000 increase in asset management fees, reflecting a $626.000 increase in broker-dealer manager fees earned in conjunction with raising funds for RRE Opportunity REIT;
•
a $663,000 increase in property management fees earned by our property manager, Resource Real Estate Management, Inc., or 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 increase in RSO management fees. The base management fee increased by $668,000 due to an increase in the equity of RSO upon which this fee is based. We also earned incentive management fees of $0 and$482,000 for the three months ended March 31, 2013 and 2012, respectively. The incentive management fees are based on the adjusted operating earnings of RSO, which varies from period to period.
Other revenues - increased by $28,000 for the three months ended March 31, 2013, principally due to the following:
•
a $1.6 million increase in gains and fees on resolution of loans and investment entities for the three months ended March 31, 2013. In January 2013, we sold our 10% interest in a real estate joint venture and recognized a gain of $1.6 million;
These increases were offset, in part, by
•
a $1.6 million decrease 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 months ended March 31, 2013, we earned $689,000 in fees primarily from the following activities:
•
the acquisition of two properties (valued at $18.6 million); and
•
the sale of two properties (valued at $13.0 million).


In comparison, during the three months ended March 31, 2012, we earned $2.3 million in fees primarily from the following activities:
•
the acquisition of two properties and two loans (valued at $38.2 million); and
•
the sale of one property, including a promoted return of $1.2 million.
•
a $15,000 decrease in equity in earnings of unconsolidated entities. During the three months ended March 31, 2013, we earned equity income of $20,000.
Costs and Expenses − Three Months Ended March 31, 2013 as Compared to Three Months Ended March 31, 2012
Costs and expenses of our real estate operations increased $2.0 million (27%). We attribute these changes primarily to the following:
•
a $933,000 in general and administrative expenses principally related to a $827,000 increase in wages and benefits. 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 as well as the additional staffing required to manage the increased properties under management and to enhance our fundraising capabilities at our broker-dealer, Resource Securities, Inc.; and
•
a $607,000 increase in Resource Residential expenses, primarily due to increased wages and benefits as well as information technology expenses due to 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 had been non-existent and had been extremely limited for CLOs. Beginning in late 2011, 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. Since its formation, CVC Credit Partners has closed four CLOs with a combined par value of approximately $1.8 billion. Subsequent to March 31, 2013, CVC Credit Partners completed a public offering of Credit Partners European Opportunities Limited ($473.0 million) which will invest in sub-investment grade European debt securities.
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. Though we are entitled to receive such fees, which are also subordinate to debt service payments, we did not receive any such fees in the three months ended March 31, 2013 and 2012. 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, based on 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
 
March 31,
 
2013
 
2012
Revenues:
 
 
 
Fund management fees
$
733

 
$
3,688

Fund management fees - incentive
409

 
—

RSO management fees - trading portfolio
226

 
840

RSO management fees
155

 
529

Structuring and placement fees
—

 
—

Introductory agent fees
331

 
569

Equity in earnings of unconsolidated CDO issuers
227

 
215

Equity in earnings of CVC Credit Partners
582

 
—

Gains, net, on trading securities
1,276

 
—

Other revenues
20

 
21

 
3,959

 
5,862

Total limited and general partner interests
328

 
442

 
$
4,287

 
$
6,304

 
 

 
 

Costs and expenses
$
2,528

 
$
4,379

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 from our financial fund management operations increased $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 increase 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.
Theses decreases were offset by the following:
•
a $1.3 million increase in realized and unrealized gains and interest recorded on our 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 primarily related to a $1.9 million decrease in wage 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.
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 increased by $10.0 million to $527.0 million as compared to $537.0 million at March 31, 2012. This increase reflects a $154.0 million reduction in assets we managed for our four investment partnerships 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 partnerships, 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 partnerships
114

 
268

 
$
527

 
$
537

 
(1)
For information on how we calculate assets under management, see - “Assets under Management”, above.
During 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 of fund management fees from these entities during the three months ended March 31, 2013, respectively, and $1.2 million during the three 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
 
March 31,
 
2013
 
2012
Revenues:
 
 
 
 Equity in losses of investment entities
$
(173
)
 
$
(87
)
 Equity in losses of LEAF
(5
)
 
(1,153
)
 
(178
)
 
(1,240
)
Costs and expenses:
 

 
 

General and administrative expenses - wages and benefit costs
$
33

 
$
49

General and administrative expenses - other
12

 
181

 
$
45

 
$
230



Results of Operations:  RSO
RSO, which we consolidate as a VIE, is a diversified real estate finance company that is organized and conducts its operations to qualify as a real estate investment trust, or REIT, for federal income tax purposes under Subchapter M of the Internal Revenue Code of 1986, as amended. RSO's investment strategy focuses on commercial real estate and commercial real estate-related assets and, to a lesser extent, commercial finance assets. RSO invests in the following asset classes: commercial real estate-related assets such as commercial real estate property, whole loans, A-notes, B-notes, mezzanine loans, commercial mortgage-backed securities and investments in real estate joint ventures as well as commercial finance assets such as bank loans, lease receivables and other asset-backed securities, trust preferred securities, debt tranches of collateralized debt obligations, structured note investments and private equity investment principally issued by financial institutions. RSO has financed a substantial portion of its portfolio investments through borrowing strategies seeking to match the maturities and repricing dates of its financings with the maturities and repricing dates of those investments, and has sought to mitigate interest rate risk through derivative instruments.
The following summarizes the operating activities of RSO for the three months ended March 31, 2013 and 2012 (in thousands):
Total interest income
$
33,320

 
$
29,849

Interest expense
11,165

 
8,383

Net interest income
22,155

 
21,466

Other revenues
8,423

 
7,260

Total revenue
30,578

 
28,726

 
 
 
 
Operating expenses
17,950

 
14,245

Net income
$
12,628

 
$
14,481

Results of Operations:  Other Costs and Expenses
General and Administrative Expenses
General and administrative costs were $2.2 million for the three months ended March 31, 2013, a decrease of $314,000 (13%) as compared to $2.5 million for the three months ended March 31, 2012. The decrease reflects 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 in those entities. During the three months ended March 31, 2013, we allocated $513,000 of additional wages to our real estate segment.
Restructuring Expenses
We recorded a $365,000 charge restructuring during the three months ended March 31, 2012 consisting of severance and benefits for terminated employees. The decrease in staffing levels reflected 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
 
March 31,
 
2013
 
2012
Commercial finance:
 
 
 
Receivables from managed entities
$
2,863

 
$
2,865

Leases, loans and future payment card receivables
(3
)
 
(6
)
Real estate:
 

 
 

Receivables from managed entities
(2,533
)
 
98

Rent receivables
11

 
5

 
$
338

 
$
2,962

    


We have estimated, based on projected cash flows, that three of the commercial finance partnerships 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 for the three months ended March 31, 2013 and 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 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.
Depreciation and Amortization
Depreciation expense decreased by $119,000 for the three months ended March 31, 2013 as compared to the prior year period. The following table reflects the detail of our depreciation expense (in thousands):
 
Three Months Ended
 
March 31,
 
2013
 
2012
Real estate property investments
$
180

 
$
234

Other operating segments depreciation on fixed assets
236

 
301

Total depreciation expense
$
416

 
$
535

Interest Expense
Interest expense includes the non-cash amortization of debt issuance costs as well as discounts related the value of the warrants issued to the original holders of our Senior Notes. The following table reflects interest expense as reported by segment (in thousands):
 
Three Months Ended
 
March 31,
 
2013
 
2012
Corporate
$
296

 
$
396

Real estate
197

 
213

Commercial finance
1

 
36

 
$
494

 
$
645

Facility utilization and issuance of Senior Notes (in millions) and corresponding interest rates on borrowings outstanding were as follows: 
 
Three Months Ended
 
March 31,
 
2013
 
2012
Corporate facilities
 
 
 
  Senior Notes: (1)
 
 
 
Average borrowings
$10.0
 
$10.0
Average interest rates
9.0%
 
9.0%
 
 
 
 
  Secured credit facilities (and TD Bank term note in 2012):
 
 
 
Average borrowings
$0.6
 
$5.3
Average interest rates
3.2%
 
6.0%
 
(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%.

As a result of the reduction in both corporate borrowings and the average interest rate on those borrowings, interest expense for the three months ended March 31, 2013 decreased by $100,000 as compared to the same period in the prior year.


Other Income
The following table details our other income, net of other expenses (in thousands):
 
Three Months Ended
 
March 31,
 
2013
 
2012
Interest income (1)
$
265

 
$
130

Amortization of unrecognized loss - retirement plan (2)
(95
)
 
(83
)
Other expense, net
19

 
78

Other income, net
$
189

 
$
125

 
(1)
Includes accretion of discount on receivables from real estate managed entities of $242,000 and $112,000 for the three months ended March 31, 2013 and 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. Our rights to the benefits of RSO are limited to the management compensation and expense reimbursements we receive and our risks associated with being an investor in RSO are limited to our ownership position. The remaining difference of RSO's net income is attributed to noncontrolling interests in the consolidated statements of operations for the periods presented. The following table sets forth the net income attributable to noncontrolling interests (in thousands):
 
Three Months Ended
 
March 31,
 
2013
 
2012
Real estate noncontrolling interest, net of tax of $(28) and $0 (1) 
$
43

 
$
39

RSO net income attributable to noncontrolling interests
(12,314
)
 
(14,030
)
 
$
(12,271
)
 
$
(13,991
)
 
(1)
A related party holds a 19.99% interest in our investment in a hotel property in Savannah, Georgia.
Income Taxes
The following table presents the detail of income tax provision (benefit) allocation for RAI and RSO (in thousands):
 
Three Months Ended
 
March 31,
 
2013
 
2012
RAI
$
(146
)
 
$
(1,323
)
RSO
1,762

 
2,615

Total
$
1,616

 
$
1,292

The effective income tax rate for RAI operations (income taxes as a percentage of income from continuing operations, before taxes) was a benefit of 26% for the three months ended March 31, 2013, as compared to a benefit of 36% for the three months ended March 31, 2012. Our effective income tax rate for RAI operations without discrete tax items would have been a provision of 14% for the three months ended March 31, 2013.  We project our effective tax rate for RAI operations to be a provision between 6% and 11% for 2013.  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 2010 and are no longer subject to state and local income tax examinations by tax authorities for fiscal years before 2007.    



Liquidity and Capital Resources
Our analysis of liquidity and capital reserves excludes the liquidity of our consolidated VIE - RSO as we do not have access to or the ability to utilize any of RSO's assets nor do we have any obligation or recourse with respect to any of its liabilities or borrowings.
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 $20.7 million included $10.0 million of Senior Notes, $10.4 million of mortgage debt (secured by the underlying hotel property) and $321,000 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.
In September 2013, we obtained approval from the holders of the Senior Notes to remove all limitations on our ability to declare and pay quarterly cash dividends. 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) 
10,123

 
123

 
10,000

 
—

 
—

Capital lease obligations (1) 
198

 
198

 
—

 
—

 
—

 
10,321

 
321

 
10,000

 
—

 
—

 
 
 
 
 
 
 
 
 
 
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
$
45,591

 
$
3,488

 
$
15,986

 
$
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: $1.6 million; 1-3 years:  $2.2 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:
 
 
 
 
 
 
 
 
 
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 after 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 equity of the entity was in excess of the valuation amount, and, as such, we have no current 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) as of March 31, 2013. 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 $113,000 as of March 31, 2013 and December 31, 2012, respectively.  As of March 31, 2013 and December 31, 2012, Resource Securities net capital was $623,000 and $258,000, respectively, which exceeded the minimum requirements by $498,000 and $145,000, 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 December 31, 2012. In the three months ended September 30, 2013, the general partner began the process of dissolving the two partnerships, and settled the clawback commitments.  Our proportionate share of these payments was $1.1 million.
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 appealed and the appellate court affirmed the dismissal as against Trapeza in August 2013.
Real estate commitments.  As a specialized asset manager, we sponsor and manage 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 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 June 2013, we funded the remaining amount.
In July 2011, the Company entered into an agreement with 1 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. In August 2013, the Company funded the remaining $250,000.
The liabilities for the real estate commitments will be recorded in the future as the amounts become due and payable.
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.
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 commitments 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, a VIE is an entity that does not have sufficient equity to finance its operations without additional subordinated financial support, or an entity for which the risks and rewards of ownership are not directly linked to voting interests. 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 managed by us, 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. Then, we compare the benefits we would receive (in the optimistic scenario) or the losses we would absorb (in the pessimistic scenario) as compared to benefits and losses absorbed by the VIE in total. If the benefits or losses absorbed by us were significant as compared to total benefits and losses absorbed by all variable interest holders, then we would conclude we are the primary beneficiary.


The financial statements as of March 31, 2013 and December 31, 2012 and for three months ended March 31, 2013 and 2012 reflect the consolidation of RSO.
Our investment in 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 consolidated 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, we had 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 in equity and debt securities. Trading securities are recorded at fair value and changes in their fair values 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 weaknesses in our internal control over financial reporting discussed in "Remediation of Material Weaknesses" below, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
We are in the process of implementing new procedures to strengthen our internal control over financial reporting. Other than these changes, as discussed below, there were no changes in our internal control over financial reporting during the quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Remediation of Material Weaknesses
As previously reported, management has identified material weaknesses in our internal control over financial reporting with respect to the valuation of our legacy real estate portfolio and to the consolidation of RSO.  Management has identified various remedial steps to be implemented with respect to the material weaknesses in internal control over financial reporting, which are currently in process.  We designed our remediation efforts to address these material weaknesses as identified by management 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 with respect to the valuation of the legacy properties, 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.
Subsequent to the periods covered in this report, in September 2013, management evaluated its internal control over financial reporting with respect to its determination that RSO should be consolidated and concluded that the deficiency was associated with our misapplication of the accounting guidance and the insufficient review of the accounting for the consolidation of variable interest entities.
Management has identified remedial steps that it is in the process of implementing with respect to this control weakness, as follows:
•
management has reviewed and re-evaluated the relevant accounting literature regarding variable interest entities and the circumstances under which they must be consolidated; and
•
management has re-evaluated and will continue to re-evaluate, based on reconsideration events, the treatment of our other unconsolidated variable interest entities to determine whether any of these entities should be consolidated.
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 weaknesses 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, 2011
 
—

 
$
—

 
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)
10.10
 
Second Amended and Restated Management Agreement between Resource Capital Corp., Resource Capital Manager, Inc. and Resource America, Inc. dated as of June 13, 2012. (15)
10.10(a)
 
Amendment No. 1 to Second Amended and Restated Management Agreement between Resource Capital Corp., Resource Capital Manager, Inc. and Resource America, Inc. dated as of November 7, 2013. (15)
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)
99.4
 
Risk factors of Resource Capital Corp. (15)
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.
(15)
Filed previously as an exhibit to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 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)
 
 
 
December 16, 2013
By:
/s/ Thomas C. Elliott
 
 
THOMAS C. ELLIOTT
 
 
Senior Vice President and Chief Financial Officer
 
 
 
December 16, 2013
By:
/s/ Arthur J. Miller
 
 
ARTHUR J. MILLER
 
 
Vice President and Chief Accounting Officer