10-Q 1 rexi2014033110q.htm 10-Q REXI.2014.03.31 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549 
Form 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
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)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition 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 5, 2014 was 20,375,918 shares.



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



PART I

ITEM 1.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
RESOURCE AMERICA, INC
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
March 31,
2014
 
December 31,
2013
 
(unaudited)
 
 
ASSETS
 
 
 
Cash
$
17,210

 
$
19,853

Restricted cash
627

 
571

Receivables
572

 
541

Loans and receivables from managed entities and related parties, net
34,506

 
30,923

Investments in real estate, net
17,167

 
17,696

Investment securities, at fair value
9,100

 
7,839

Investments in unconsolidated loan manager (see Note 8)
38,181

 
37,821

Investments in unconsolidated entities
13,609

 
14,342

Assets of consolidated variable interest entity ("VIE") - RSO (see Note 19):
 
 
 
     Cash and cash equivalents (including restricted cash)
282,638

 
325,579

     Investments, at fair value
243,538

 
226,764

     Loans
1,618,060

 
1,397,458

     Investments in real estate and unconsolidated entities
117,280

 
124,193

Other assets
79,819

 
76,467

Total assets of consolidated VIE - RSO
2,341,335


2,150,461

 
 
 
 
Property and equipment, net
5,566

 
5,844

Deferred tax assets, net
26,587

 
27,769

Other assets
5,431

 
4,791

Total assets
$
2,509,891

 
$
2,318,451

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Accrued expenses and other liabilities
$
22,698

 
$
22,134

Payables to managed entities and related parties
3,112

 
3,110

Borrowings
20,501

 
20,619

Liabilities of consolidated VIE - RSO (see Note 19):
 
 
 
     Borrowings
1,502,266

 
1,320,015

     Other liabilities
56,934

 
55,247

Total liabilities of consolidated VIE - RSO
1,559,200

 
1,375,262

Total liabilities
1,605,511

 
1,421,125

 
 
 
 
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;
30,807,746 and 30,378,339 shares issued (including nonvested restricted stock of 689,904 and 400,194), respectively
301

 
299

Additional paid-in capital
288,958

 
288,555

Accumulated deficit
(26,023
)
 
(26,025
)
Treasury stock, at cost; 10,440,319 and 10,434,436 shares, respectively
(107,905
)
 
(107,874
)
Accumulated other comprehensive loss
(1,164
)
 
(1,231
)
Total stockholders’ equity
154,167

 
153,724

Noncontrolling interests
221

 
238

Noncontrolling interests attributable to RSO
749,992

 
743,364

Total equity
904,380

 
897,326

 
$
2,509,891

 
$
2,318,451



RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
Three Months Ended
 
March 31,
 
2014
 
2013
REVENUES:
 
 
 
Real estate (includes revenues of $2,683 and $2,288 related to RSO)
$
13,275

 
$
11,340

Financial fund management (includes revenues of $207 and $381 related to RSO)
7,075

 
4,287

Commercial finance (includes no revenue related to RSO)
(99
)
 
(178
)
 
20,251

 
15,449

Revenues from consolidated VIE - RSO (see Note 19)
31,931

 
30,578

Elimination of consolidated VIE revenues attributed to operating segments
(2,880
)
 
(2,700
)
Total revenues
49,302

 
43,327

COSTS AND EXPENSES:
 
 
 
Real estate
8,875

 
9,440

Financial fund management
4,389

 
2,528

Commercial finance
103

 
45

General and administrative
3,154

 
2,153

Provision for credit losses
1,208

 
338

Depreciation and amortization
451

 
416

 
18,180

 
14,920

Expenses from consolidated VIE - RSO (see Note 19)
13,124

 
16,188

Elimination of consolidated VIE expenses attributed to operating segments
(2,819
)
 
(2,654
)
Total expenses
28,485

 
28,454

OPERATING INCOME
20,817

 
14,873

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

 
(214
)
Interest expense
(483
)
 
(494
)
Other income (expense), net
165

 
189

 
(318
)
 
(519
)
Other (expense) income, net, from consolidated VIE - RSO (see Note 19)
(1,331
)
 
—

Elimination of consolidated VIE other income attributed to operating segments
18

 
31

 
(1,631
)
 
(488
)
Income from continuing operations before taxes
19,186

 
14,385

Income tax provision (benefit)
1,069

 
(146
)
Income tax provision - RSO
16

 
1,762

Income from continuing operations
18,101

 
12,769

Loss from discontinued operations, net of tax
—

 
(2
)
Net income
18,101

 
12,767

Net loss attributable to noncontrolling interests
40

 
43

Net income attributable to noncontrolling interests of consolidated VIE - RSO
(17,151
)
 
(12,314
)
Net income attributable to common shareholders
$
990

 
$
496

Amounts attributable to common shareholders:
 
 
 
Income from continuing operations
$
990

 
$
498

Discontinued operations
—

 
(2
)
Net income
$
990

 
$
496

 
 
 
 
Basic earnings per share:
 
 
 
Continuing operations
$
0.05

 
$
0.02

Discontinued operations
—

 
—

Net income
$
0.05

 
$
0.02

Weighted average shares outstanding
20,252

 
20,124

 
 
 
 
Diluted earnings per share:
 
 
 
Continuing operations
$
0.04

 
$
0.02

Discontinued operations
—

 
—

Net income
$
0.04

 
$
0.02

Weighted average shares outstanding
22,027

 
21,815




The accompanying notes are an integral part of these statements
5


RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
(unaudited)
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
 
 
 
Net income
$
18,101

 
$
12,767

 
 
 
 
Other comprehensive income (loss):
 

 
 

Unrealized gain (loss) on investment securities available-for-sale, net of tax of $19 and $(217)
28

 
(351
)
Reclassification for losses realized, net of tax of $0 and $83
—

 
131

 
28

 
(220
)
Reclassification for losses realized, net of tax of $33 and $9
36

 
87

 
 
 
 
Unrealized gain on hedging contracts, net of tax of $1 and $5
1

 
5

 
 
 
 
Foreign currency translation gain, net of tax of $0 and $0
2

 
—

Subtotal - activity related to RAI
67

 
(128
)
 
 
 
 
Activity related to consolidated VIE - RSO:
 
 
 
Unrealized (losses) gains on available for sale securities, net
(1,754
)
 
5,223

Reclassification adjustments for realized gains realized in net income
1,465

 
(627
)
Unrealized gain on derivatives, net
387

 
652

Reclassification adjustments associated with realized losses from interest rate hedges included in net income
70

 
55

Foreign currency translation gain
(196
)
 
—

Subtotal - activity related to RSO
(28
)
 
5,303

Subtotal - other comprehensive income
39

 
5,175

Comprehensive income
18,140

 
17,942

Less: Comprehensive income attributable to noncontrolling interests
(17,083
)
 
(17,574
)
Comprehensive income attributable to common shareholders
$
1,057

 
$
368



The accompanying notes are an integral part of these statements
6


RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2014
(dollars in thousands)
(unaudited)
 
Common Stock Shares
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Treasury Stock
 
Accumulated Other Comprehensive (Loss) Income
 
Total Stockholders’ Equity
 
Noncontrolling Interests
 
Noncontrolling
interests
RSO
 
Total Equity
Balance, December 31, 2013
19,943,903

 
$
299

 
$
288,555

 
$
(26,025
)
 
$
(107,874
)
 
$
(1,231
)
 
$
153,724

 
$
238

 
$
743,364

 
$
897,326

Net income
—

 
—

 
—

 
990

 
—

 
—

 
990

 
(40
)
 
17,151

 
18,101

Treasury shares issued
17,181

 
—

 
(19
)
 
—

 
177

 
—

 
158

 
—

 
—

 
158

Stock-based compensation
429,407

 
2

 
422

 
—

 
—

 
—

 
424

 
—

 
—

 
424

Repurchase of common stock
(23,064
)
 
—

 
—

 
—

 
(208
)
 
—

 
(208
)
 
—

 
—

 
(208
)
Cash dividends
—

 
—

 
—

 
(988
)
 
—

 
—

 
(988
)
 
—

 
—

 
(988
)
Change in non controlling interests in consolidated VIE - RSO
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(10,495
)
 
(10,495
)
Other
—

 
—

 
—

 
—

 
—

 
—

 
—

 
23

 
—

 
23

Other comprehensive income (loss)
—

 
—

 
—

 
—

 
—

 
67

 
67

 
—

 
(28
)
 
39

Balance, March 31, 2014
20,367,427

 
$
301

 
$
288,958

 
$
(26,023
)
 
$
(107,905
)
 
$
(1,164
)
 
$
154,167

 
$
221

 
$
749,992

 
$
904,380

 

The accompanying notes are an integral part of these statements
7


RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended
 
March 31,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
18,101

 
$
12,767

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
494

 
456

Provision for credit losses
1,208

 
338

Unrealized losses (gains) on trading securities
71

 
(745
)
Equity in earnings of unconsolidated entities
(631
)
 
(1,261
)
Distributions from unconsolidated entities
1,510

 
716

Other-than-temporary impairment on investments
—

 
214

Gain on sale of investment securities, net
(188
)
 
(517
)
Gain on sale of assets
—

 
(1,606
)
Deferred income tax provision (benefit)
1,069

 
(146
)
Equity-based compensation issued
404

 
293

Trading securities purchases and sales, net
(442
)
 
2,831

Loss from discontinued operations
—

 
2

Changes in operating assets and liabilities
(4,980
)
 
4,168

Change in cash attributable to operations of consolidated VIE - RSO
97,264

 
27,633

Net cash provided by operating activities
113,880

 
45,143

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(42
)
 
(171
)
Payments received on real estate loans and real estate
—

 
2,049

Investments in unconsolidated real estate entities
(79
)
 
(509
)
Purchase of loans and securities by consolidated VIE - RSO
(217,701
)
 
(209,991
)
Principal payments and proceeds from sales received by consolidated VIE - RSO
136,561

 
275,199

Purchase of loans and investments
(678
)
 
(1,526
)
Decrease in restricted cash of consolidated VIE - RSO
(12,849
)
 
(19,241
)
Other investing activity of consolidated VIE
(25,013
)
 
(4,035
)
Net cash (used in) provided by investing activities
(119,801
)
 
41,775

 
 
 
 

The accompanying notes are an integral part of these statements
8


RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(in thousands)
(unaudited)
 
Three Months Ended
 
March 31,
 
2014
 
2013
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Increase in borrowings
—

 
2,000

Principal payments on borrowings
(117
)
 
(2,111
)
Net borrowings (repayments) of debt by consolidated VIE - RSO
16,209

 
(104,196
)
Dividends paid
(980
)
 
(589
)
Dividends paid on common stock by consolidated VIE - RSO
(24,964
)
 
(20,422
)
Net proceeds from issuance of common stock by consolidated VIE - RSO
15,660

 
44,862

Repurchase of common stock
—

 
(54
)
Other
(56
)
 
95

Other financing activity of consolidated VIE - RSO
(2,474
)
 
(2,535
)
Net cash provided by (used in) financing activities
3,278

 
(82,950
)
CASH FLOWS FROM DISCONTINUED OPERATIONS:
 

 
 

Operating activities
—

 
(495
)
Net cash used in discontinued operations
—

 
(495
)
 
 
 
 
(Decrease) increase in cash
(2,643
)
 
3,473

Cash, beginning of year
19,853

 
11,899

Cash, end of period
$
17,210

 
$
15,372







The accompanying notes are an integral part of these statements
9

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
(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”). RSO is reflected on a consolidated basis with our financial statements for all periods presented (see Note 19).
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, 2014 may not necessarily be indicative of the results of operations for the full year ending December 31, 2014.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements reflect the Company's accounts and the accounts of the Company's majority-owned and/or controlled subsidiaries. The Company follows the provisions of Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” and accordingly consolidates entities that are variable interest entities (“VIEs”) where it has determined that it is the primary beneficiary of such entities. Once it is determined that the Company holds a variable interest in a VIE, management must perform a qualitative analysis to determine (i) if the Company has the power to direct the matters that most significantly impact the VIE's financial performance; and (ii) if the Company has the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive the benefits of the VIE that could potentially be significant to the VIE. If the Company's interest possesses both of these characteristics, the Company is deemed to be the primary beneficiary and would be required to consolidate the VIE. The Company will continually assess its involvement with VIEs and re-evaluate 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.
All intercompany transactions and balances have been eliminated in the Company's consolidated financial statements.
Use of Estimates
Preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and costs and expenses during the reporting period. The Company makes estimates of its allowance for credit losses, the valuation allowance against its 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 its investments in investment securities. Actual results could differ from these estimates.
The New York State 2014-2015 Budget Act (“N.Y. Budget Act”). The N.Y. Budget Act was signed into law on March 31, 2014. The N.Y. Budget Act substantially modified and reformed various aspects of New York State tax law. The Company anticipates that the legislation will reduce the amount of taxable income apportioned to New York State, thereby reducing its state effective income tax rate beginning in 2015.


Financing Receivables - Receivables from Managed Entities

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

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 based on projected net operating income as a multiple of published capitalization rates, as reduced by the underlying mortgage balances and priority distributions due to the investors.
Investment Securities
The Company’s investment securities available-for-sale, including investments in the collateralized loan obligation ("CLO") issuers it sponsored, are carried at fair value.  The fair value of the CLO investments is based primarily on internally-generated expected cash flow models that require significant management judgment and estimates due to the lack of market activity and the use of unobservable pricing inputs.  The investments in the common stock of The Bancorp, Inc. (“TBBK”) (NASDAQ: TBBK) and in Resource Real Estate Diversified Income Fund ("DIF") (NASDAQ: RREDX), affiliated entities, are valued at the closing prices of the respective publicly-traded stocks.  The Company's investment in Resource Real Estate Global Property Securities ("RREGP"), also an affiliated entity, is valued at net asset value. The cumulative net unrealized gains (losses) on these investment securities, net of tax, is reported through accumulated other comprehensive income (loss).  Realized gains (and losses) on the sale of investments are determined on the trade date on the basis of specific identification and are included in net operating results. RREGP, an Australian investment fund structured as a unit trust, is managed by a joint venture which the Company consolidates due to its 75% ownership interest.
Recent Accounting Standards
Newly-Adopted Accounting Principles
The Company’s adoption of the following standard during the three months ended March 31, 2014 did not have a material impact on its consolidated financial position, results of operations or cash flows:
In July 2013, the Financial Accounting Standards Board ("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 thereof, 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 adoption by the Company of this guidance did not have a material impact on its consolidated financial statements.
Accounting Standards Issued But Not Yet Effective
In April 2014, the FASB issued authoritative guidance to change the criteria for reporting discontinued operations. Under the new guidance, only disposals representing a strategic shift in a company's operations and financial results should be reported as discontinued operations, with expanded disclosures. In addition, disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify as a discontinued operation is required. This guidance is effective for the Company as of January 1, 2015, with early adoption permitted. The Company does not believe that adoption of this guidance will have a material impact on its consolidated financial statements.


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

NOTE 3 - CONSOLIDATING FINANCIAL INFORMATION
The following table presents the consolidating balance sheet as of March 31, 2014 (in thousands):
 
RAI
 
RSO
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
Cash
$
17,210

 
$
—

 
$
—

 
$
17,210

Restricted cash
627

 
—

 
—

 
627

Receivables
660

 
—

 
(88
)
 
572

Receivables from managed entities and related parties, net
37,109

 
—

 
(2,603
)
 
34,506

Investments in real estate, net
17,167

 
—

 
—

 
17,167

Investment securities, at fair value
25,049

 
—

 
(15,949
)
 
9,100

Investments in unconsolidated loan manager
38,181

 
—

 
—

 
38,181

Investments in unconsolidated entities
13,609

 
—

 
—

 
13,609

Assets of consolidated variable interest entities ("VIE") - RSO:
 
 
 
 
 
 
 
     Cash and cash equivalents (including restricted cash)
—

 
282,638

 
—

 
282,638

     Investments, at fair value
—

 
243,538

 
—

 
243,538

     Loans
—

 
1,618,618

 
(558
)
 
1,618,060

     Investments in real estate and unconsolidated entities
—

 
117,280

 
—

 
117,280

     Other assets - RSO
—

 
79,834

 
(15
)
 
79,819

Total assets of consolidated VIE - RSO
—

 
2,341,908

 
(573
)
 
2,341,335

Property and equipment, net
5,566

 
—

 
—

 
5,566

Deferred tax assets, net
35,463

 
—

 
(8,876
)
 
26,587

Other assets
5,431

 
—

 
—

 
5,431

Total assets
$
196,072

 
$
2,341,908

 
$
(28,089
)
 
$
2,509,891

 
 
 
 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Accrued expenses and other liabilities
$
22,698

 
$
—

 
$
—

 
$
22,698

Payables to managed entities and related parties
3,127

 
—

 
(15
)
 
3,112

Borrowings
21,059

 
—

 
(558
)
 
20,501

Liabilities of consolidated VIE - RSO:
 
 
 
 
 
 
 
     Borrowings
—

 
1,502,089

 
177

 
1,502,266

     Other liabilities
—

 
59,625

 
(2,691
)
 
56,934

Total liabilities of consolidated VIE - RSO
—

 
1,561,714

 
(2,514
)
 
1,559,200

Total liabilities
46,884

 
1,561,714

 
(3,087
)
 
1,605,511

Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity:
 
 
 
 
 
 
 
Preferred stock
—

 
—

 
—

 
—

Common stock
301

 
—

 
—

 
301

Additional paid-in capital
288,958

 
—

 
—

 
288,958

Accumulated deficit
(21,544
)
 
—

 
(4,479
)
 
(26,023
)
Treasury stock, at cost
(107,905
)
 
—

 
—

 
(107,905
)
Accumulated other comprehensive loss
(10,843
)
 
—

 
9,679

 
(1,164
)
Total stockholders’ equity
148,967

 
—

 
5,200

 
154,167

Noncontrolling interests
221

 
—

 
—

 
221

Noncontrolling interest attributable to RSO
—

 
780,194

 
(30,202
)
 
749,992

Total equity
149,188

 
780,194

 
(25,002
)
 
904,380

 
$
196,072

 
$
2,341,908

 
$
(28,089
)
 
$
2,509,891


    

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)


The following table presents the consolidating statement of operations for the three months ended March 31, 2014 (in thousands):
 
RAI
 
RSO
 
Eliminations
 
Consolidated
REVENUES:
 
 
 
 
 
 
 
Real estate
$
13,275

 
$
—

 
$
—

 
$
13,275

Financial fund management
7,075

 
—

 
—

 
7,075

Commercial finance
(99
)
 
—

 
—

 
(99
)
 
20,251

 
—

 
—

 
20,251

Revenues from consolidated VIE - RSO
—

 
31,931

 
—

 
31,931

Elimination of consolidated VIE revenues attributed to operating segments
—

 
—

 
(2,880
)
 
(2,880
)
Total revenues
20,251

 
31,931

 
(2,880
)
 
49,302

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Real estate
8,875

 
—

 
—

 
8,875

Financial fund management
4,389

 
—

 
—

 
4,389

Commercial finance
103

 
—

 
—

 
103

General and administrative
3,154

 
—

 
—

 
3,154

Provision for credit losses
1,208

 
—

 
—

 
1,208

Depreciation and amortization
451

 
—

 
—

 
451

 
18,180

 
—

 
—

 
18,180

Expenses from consolidated VIE - RSO
—

 
13,140

 
(16
)
 
13,124

Elimination of consolidated VIE expenses attributed to operating segments
—

 
—

 
(2,819
)
 
(2,819
)
Total expenses
18,180

 
13,140

 
(2,835
)
 
28,485

OPERATING INCOME
2,071

 
18,791

 
(45
)
 
20,817

 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Interest expense
(483
)
 
—

 
—

 
(483
)
Other income, net
737

 
—

 
(572
)
 
165

Other income, net, from consolidated VIE - RSO
—

 
(1,331
)
 
—

 
(1,331
)
Elimination of consolidated VIE other income, net
—

 
—

 
18

 
18

 
254

 
(1,331
)
 
(554
)
 
(1,631
)
Income from continuing operations before taxes
2,325

 
17,460

 
(599
)
 
19,186

Income tax provision
1,069

 
—

 
16

 
1,085

Net income
1,256

 
17,460

 
(615
)
 
18,101

Net loss attributable to noncontrolling interests
40

 
—

 
—

 
40

Net income attributable to noncontrolling interests - RSO
—

 
(2,344
)
 
(14,807
)
 
(17,151
)
Net income attributable to common shareholders
$
1,296

 
$
15,116

 
$
(15,422
)
 
$
990

 
 
 
 
 
 
 
 
Amounts attributable to common shareholders:
 
 
 
 
 
 
 
Income from continuing operations
$
1,296

 
$
15,116

 
$
(15,422
)
 
$
990

Discontinued operations
—

 
—

 
—

 
—

Net income
$
1,296

 
$
15,116

 
$
(15,422
)
 
$
990




    

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

The following table presents the consolidating statement of cash flows for the three months ended March 31, 2014 (in thousands):
 
RAI
 
RSO
 
Eliminations
 
Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
Net income
$
1,256

 
$
17,460

 
$
(615
)
 
$
18,101

Adjustments to reconcile net income to net cash
used in operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
494

 
—

 
—

 
494

Provision for credit losses
1,208

 
—

 
—

 
1,208

Unrealized losses (gains) on trading securities
95

 
—

 
(24
)
 
71

Equity in earnings of unconsolidated entities
(631
)
 
—

 
—

 
(631
)
Distributions from unconsolidated entities
1,510

 
—

 
—

 
1,510

Gain on sale of investment securities, net
(283
)
 
—

 
95

 
(188
)
Deferred income tax provision (benefit)
1,069

 
—

 
—

 
1,069

Equity-based compensation issued
404

 
—

 
—

 
404

Trading securities purchases and sales, net
(442
)
 
—

 
—

 
(442
)
Changes in operating assets and liabilities
(4,980
)
 
—

 
—

 
(4,980
)
Change in cash attributable to operations of consolidated VIE - RSO
—

 
97,292

 
(28
)
 
97,264

Net cash (used in) provided by operating activities
(300
)
 
114,752

 
(572
)
 
113,880

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
Capital expenditures
(42
)
 
—

 
—

 
(42
)
Investments in unconsolidated real estate entities
(79
)
 
—

 
—

 
(79
)
Purchase of loans and securities by consolidated VIE - RSO
—

 
(217,701
)
 
—

 
(217,701
)
Principal payments and proceeds from sales received by consolidated VIE - RSO
—

 
136,561

 
—

 
136,561

Purchase of loans and investments
(678
)
 
—

 
—

 
(678
)
Increase in restricted cash of consolidated VIE - RSO
—

 
(12,849
)
 
—

 
(12,849
)
Other investing activity of consolidated VIE - RSO
—

 
(24,622
)
 
(391
)
 
(25,013
)
Net cash used in investing activities
(799
)
 
(118,611
)
 
(391
)
 
(119,801
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
Principal payments on borrowings
(508
)
 
—

 
391

 
(117
)
Net borrowings (repayments) of debt by consolidated VIE - RSO
—

 
16,209

 
—

 
16,209

Dividends paid
(980
)
 
—

 
—

 
(980
)
Dividends paid on common stock by consolidated VIE - RSO
—

 
(25,536
)
 
572

 
(24,964
)
Net proceeds from issuance of common stock by consolidated VIE - RSO
—

 
15,660

 
—

 
15,660

Other
(56
)
 
—

 
—

 
(56
)
Other financing activity of consolidated VIE - RSO
—

 
(2,474
)
 
—

 
(2,474
)
Net cash (used in) provided by financing activities
(1,544
)
 
3,859

 
963

 
3,278

 
 
 
 
 
 
 
 
Decrease in cash
(2,643
)
 
—

 
—

 
(2,643
)
Cash, beginning of year
19,853

 
—

 
—

 
19,853

Cash, end of period
$
17,210

 
$
—

 
$
—

 
$
17,210



RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

NOTE 4 – SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information are as follows (in thousands, per share data):
 
Three Months Ended
 
March 31,
 
2014
 
2013
Cash (paid) received:
 
 
 
Interest
$
(409
)
 
$
(441
)
Income tax payments
(176
)
 
(863
)
Refund of income taxes
47

 
13

 
 
 
 
Dividends declared per common share
$
0.05

 
$
0.03

 
 
 
 
Non-cash activities:
 

 
 

Repurchases of common stock from employees in exchange for the payment of income taxes
$
207

 
$
28

Issuance of treasury stock for the Company's investment savings 401(k) plan
178

 
109

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, 2014 (in thousands):
 
30-89 Days
Past Due
 
Greater than
90 Days
 
Greater than
181 Days
 
Total
Past Due
 
Current
 
Total
Loans and receivables from
   managed entities and
   related parties: (1)
 
 
 
 
 
 
 
 
 
 
 
Commercial finance
    investment entities (2)
$
—

 
$
—

 
$
45,239

 
$
45,239

 
$
994

 
$
46,233

Real estate investment entities
1,298

 
560

 
17,221

 
19,079

 
5,413

 
24,492

Financial fund management entities
25

 
2

 
41

 
68

 
727

 
795

Other
17

 
68

 
—

 
85

 
342

 
427

 
1,340

 
630

 
62,501

 
64,471

 
7,476

 
71,947

Rent receivables - real estate
7

 
9

 
1

 
17

 
58

 
75

Total financing receivables
$
1,347

 
$
639

 
$
62,502

 
$
64,488

 
$
7,534

 
$
72,022

 
(1)
Receivables are presented gross of an allowance for credit losses of $37.4 million related to the Company’s commercial finance investment entities.  The remaining receivables from managed entities and related parties have no related allowance for credit losses.
(2)
Pursuant to a guarantee agreement, the Company made a payment to the lender of one of its commercial finance investment partnerships. In making the payment, the Company assumed the rights of the lender, with the resulting note being collateralized by the portfolio of leases and loans held by the partnership (see Note 17).
    

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(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, 2013 (in thousands):
 
30-89 Days
Past Due
 
Greater than
90 Days
 
Greater than
181 Days
 
Total
Past Due
 
Current
 
Total
Loans and receivables from
   managed entities and
   related parties: (1)
 
 
 
 
 
 
 
 
 
 
 
Commercial finance
    investment entities
$
—

 
$
—

 
$
44,355

 
$
44,355

 
$
48

 
$
44,403

Real estate investment entities
793

 
1,229

 
16,323

 
18,345

 
3,142

 
21,487

Financial fund management entities
35

 
3

 
29

 
67

 
1,071

 
1,138

Other
33

 
21

 
—

 
54

 
70

 
124

 
861

 
1,253

 
60,707

 
62,821

 
4,331

 
67,152

Rent receivables - real estate
14

 
4

 
10

 
28

 
63

 
91

Total financing receivables
$
875

 
$
1,257

 
$
60,717

 
$
62,849

 
$
4,394

 
$
67,243

 
(1)
Receivables are presented gross of an allowance for credit losses of $36.2 million related to the Company’s commercial finance investment entities.  The remaining receivables from managed entities and related parties have no related allowance for credit losses.
The following table summarizes the activity in the allowance for credit losses for all financing receivables (in thousands):
 
Loans and receivables
from Managed
Entities
 
Leases and
Loans
 
Rent
Receivables
 
Total
Three Months Ended March 31, 2014:
 
 
 
 
 
 
 
Balance, beginning of year
$
36,229

 
$
—

 
$
14

 
$
36,243

Provision for credit losses
1,213

 
(1
)
 
(4
)
 
1,208

Charge-offs
(1
)
 
—

 
—

 
(1
)
Recoveries
—

 
1

 
—

 
1

Balance, end of year
$
37,441

 
$
—

 
$
10

 
$
37,451

 
 
 
 
 
 
 
 
Ending balance, individually evaluated for impairment
$
37,441

 
$
—

 
$
—

 
$
37,441

Ending balance, collectively evaluated for impairment
—

 
—

 
10

 
10

Balance, end of year
$
37,441

 
$
—

 
$
10

 
$
37,451

 
 
 
 
 
 
 
 
Three Months Ended March 31, 2013:
 

 
 

 
 

 
 

Balance, beginning of year
$
32,560

 
$
—

 
$
68

 
$
32,628

Provision for credit losses
330

 
(3
)
 
11

 
338

Charge-offs
—

 
—

 
(25
)
 
(25
)
Recoveries
16

 
3

 
—

 
19

Balance, end of year
$
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 year
$
32,906

 
$
—

 
$
54

 
$
32,960


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

The Company’s financing receivables (presented exclusive of any allowance for credit losses) as of March 31, 2014 relate to the balance in the allowance for credit losses, as follows (in thousands):
 
Loans and receivables
from Managed
Entities
 
Rent
Receivables
 
Total
Ending balance, individually evaluated for impairment
$
71,947

 
$
—

 
$
71,947

Ending balance, collectively evaluated for impairment
—

 
75

 
75

Balance, end of year
$
71,947

 
$
75

 
$
72,022

The Company’s financing receivables (presented exclusive of any allowance for credit losses) as of December 31, 2013 relate to the balance in the allowance for credit losses, as follows (in thousands):
 
Loans and receivables
from Managed
Entities
 
Rent
Receivables
 
Total
Ending balance, individually evaluated for impairment
$
67,152

 
$
—

 
$
67,152

Ending balance, collectively evaluated for impairment
—

 
91

 
91

Balance, end of year
$
67,152

 
$
91

 
$
67,243

The following table discloses information about the Company’s impaired financing receivables (in thousands):
 
Net Balance
 
Unpaid Balance
 
Specific Allowance
 
Average Investment in Impaired Assets
As of March 31, 2014
 
 
 
 
 
 
 
Financing receivables with a specific valuation allowance:
 

 
 

 
 

 
 

Loans and receivables from managed entities – commercial finance
$
2,797

 
$
40,238

 
$
37,441

 
$
39,161

Rent receivables – real estate
—

 
10

 
10

 
21

 
 
 
 
 
 
 
 
As of December 31, 2013
 
 
 
 
 
 
 
Financing receivables with a specific valuation allowance:
 

 
 

 
 

 
 

Loans and receivables from managed entities – commercial finance
$
2,690

 
$
38,919

 
$
36,229

 
$
38,649

Rent receivables – real estate
—

 
14

 
14

 
32

The Company had no impaired financing receivables without a specific allowance as of March 31, 2014 and December 31, 2013.
NOTE 6 – INVESTMENTS IN REAL ESTATE
The Company’s investments in real estate, net, consist of the following (in thousands):
 
March 31,
2014
 
December 31,
2013
Properties owned, net of accumulated depreciation of $8,795 and $8,666:
 
 
 
  Hotel property (Savannah, Georgia)
$
10,233

 
$
10,504

  Office building (Philadelphia, Pennsylvania)
775

 
781

 
11,008

 
11,285

Partnerships and other investments
6,159

 
6,411

Total investments in real estate, net
$
17,167

 
$
17,696


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

The contractual future minimum rental income on non-cancelable operating leases included in properties owned for each of the five succeeding annual periods ending March 31, and thereafter, are as follows (in thousands):
2015
$
1,054

2016
790

2017
651

2018
576

2019
491

Thereafter
581

Total
$
4,143

NOTE 7 − INVESTMENT SECURITIES
Components of investment securities are as follows (in thousands):
 
March 31,
2014
 
December 31,
2013
Available-for-sale securities
$
8,123

 
$
7,522

Trading securities
977

 
317

Total investment securities, at fair value
$
9,100

 
$
7,839

Available-for-sale securities.  The following table discloses the pre-tax unrealized gains (losses) relating to the Company’s investments in available-for-sale securities (in thousands):
 
Cost or
Amortized Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
March 31, 2014
 
 
 
 
 
 
 
CLO securities
$
5,844

 
$
1,298

 
$
(147
)
 
$
6,995

Equity securities
886

 
248

 
(6
)
 
1,128

Total
$
6,730

 
$
1,546

 
$
(153
)
 
$
8,123

 
 
 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

 
 

CLO securities
$
5,971

 
$
1,315

 
$
(196
)
 
$
7,090

Equity securities
208

 
232

 
(8
)
 
432

Total
$
6,179

 
$
1,547

 
$
(204
)
 
$
7,522

CLO securities.  The CLO securities represent the Company’s retained equity interest in ten CLO issuers that CVC Credit Partners (see Note 8) manages at March 31, 2014 and December 31, 2013.  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 holds 18,972 shares of TBBK common stock.  This investment is pledged as collateral for one of the Company’s secured corporate credit facilities. The Company also holds 10,000 shares of DIF with a cost basis of $100,000. During the three months ended March 31, 2014, the Company purchased 749,976 units of RREGP for $677,400.
Trading securities. The Company had net gains on trading securities of $117,000 and $1.3 million during the three months ended March 31, 2014 and 2013, respectively, including unrealized losses of $71,000 and unrealized gains of $745,000, respectively, which were included in Financial Fund Management Revenues on the consolidated statements of operations.
    

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

Unrealized losses in available-for-sale securities, along with their related fair value, 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
Losses
 
Number of Securities
 
Fair Value
 
Unrealized
Losses
 
Number of Securities
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
CLO securities
$
2,292

 
$
(147
)
 
3

 
$
—

 
$
—

 
—

Equity securities
771

 
(6
)
 
2

 
—

 
—

 
—

Total
$
3,063

 
$
(153
)
 
$
5

 
$
—

 
$
—

 
—

December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
CLO securities
$
2,312

 
$
(196
)
 
3

 
$
—

 
$
—

 
—

Equity securities
92

 
(8
)
 
1

 
—

 
—

 
—

Total
$
2,404

 
$
(204
)
 
4

 
$
—

 
$
—

 
—

Other-than-temporary impairment losses.  In the three months ended March 31, 2014 and 2013, the Company recorded charges of $0 and $214,000, 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,
 
December 31,
 
 
2014
 
2013
Real estate investment entities
1% – 12%
 
$
7,712

 
$
8,271

Financial fund management partnerships
3% − 50%
 
4,888

 
5,294

Trapeza entities
33% − 50%
 
1,009

 
777

Investments in unconsolidated entities
 
 
$
13,609

 
$
14,342

Included in investments in unconsolidated entities is the Company's $2.5 million investment in RRE Opportunity REIT I ("Opportunity REIT I"), which completed its initial public offering in December 2013 as well as a $200,000 investment in RRE Opportunity REIT II ("Opportunity REIT II"), which is in its offering stage. The Company accounts for its investment in Opportunity REIT I on the cost method since the Company has less than a 1% ownership.
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, 2014
 
Three Months Ended 
 March 31, 2013
Management fee revenues
$
12,388

 
$
8,248

Costs and expenses
(11,295
)
 
(6,485
)
Net income
$
1,093

 
$
1,763

Portion of net income attributable to the Company
$
361

 
$
582


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

In conjunction with the CVC Credit Partners joint venture, the Company retained a preferred interest in Apidos (which became a subsidiary of CVC Credit Partners) relating to incentive management fees on legacy CLOs that had been sponsored and managed by Apidos. The Company accounts for this interest, with a book value of $6.8 million at March 31, 2014, on the cost method. As these incentive fees are received, in accordance with its preferred interest, the Company receives a distribution of 75% of those amounts which will initially be recorded as income, net of any contractual amounts due to third-parties. The Company continually evaluates 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. At such time that the investment has been reduced to zero, all subsequent distributions will be recorded as income.
NOTE 9 − ACCRUED EXPENSES AND OTHER LIABILITIES
The following is a summary of the components of accrued expenses and other liabilities (in thousands):
 
March 31,
2014
 
December 31,
2013
Accounts payable and other accrued liabilities
$
8,655

 
$
7,439

SERP liability
4,819

 
4,998

Accrued wages and benefits
4,190

 
4,304

Deferred rent
2,601

 
2,675

Apidos contractual obligation (see Note 16)
1,119

 
995

Dividends payable
985

 
977

Short term insurance notes
329

 
746

  Total accrued expenses and other liabilities
$
22,698

 
$
22,134

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, 2014
 
December 31,
2013
 
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
 

 
10,236

 
10,287

Other debt
 

 
265

 
332

Total borrowings outstanding
 

 
$
20,501

 
$
20,619


(1)
The amount of the facility as shown has been reduced for outstanding letters of credit of $503,000 at March 31, 2014.
Corporate and Real Estate Debt
TD Bank, N.A. (“TD Bank”).  As of March 31, 2014, the terms of the Company's line of credit with TD Bank allowed for borrowings up to $7.5 million at an interest rate of (a) the prime rate of interest plus 2.25% or (b) London Interbank Offered Rate ("LIBOR") plus 3%. The LIBOR rate varies from one to six months depending upon the period of the borrowing. 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 of outstanding letters of credit.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

In April 2014, the Company amended the TD facility to (i) extend the maturity date to the earlier of (a) the expiration of its management agreement with RSO or (b) December 31, 2017, (ii) increase the maximum revolving credit amount to $11.5 million provided that the Company maintains an aggregate value of pledged securities of $6.0 million and (iii) require that the Company have no cash advances outstanding for thirty consecutive days during each one-year period beginning on April 25, 2014.
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 collateralized debt and loan obligation issuers, (ii) a pledge of 18,972 shares of TBBK common stock, and (iii) a pledge of 2,160,671 shares of RSO common stock.  
There were no borrowings outstanding as of March 31, 2014 on the secured credit facility and the availability on the revolving line of credit portion of the facility was $7.0 million, as reduced for letters of credit. Weighted average borrowings on the line of credit for the three months ended March 31, 2014 and 2013 were $0 and $600,000, respectively, at a weighted average borrowing rate of 0.0% and 3.2%, respectively.
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 certain real estate collateral located 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 real estate, based upon the most recent appraisal delivered to the bank 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 loan has an unused annual facility fee equal to 0.25%. In November 2013, the Company further amended this facility to extend the maturity date to December 28, 2016 and increase the unused fee to 0.50%. There were no borrowings under this facility during the three months ended March 31, 2014 and 2013 and the availability as of March 31, 2014 was $3.5 million.
Senior Notes
The Company's $10.0 million of 9% notes mature on March 31, 2015. The notes were issued with detachable 5-year warrants to purchase 3,690,195 shares of common stock, of which 3,444,607 were outstanding as of March 31, 2014. The effective interest rate for the three months ended March 31, 2014 and 2013 was 9.4% and 9.8%, respectively.
Debt repayments
Annual principal payments on the Company’s aggregate borrowings for the next five years ending March 31, and thereafter, are as follows (in thousands):
2015
$
10,386

2016
294

2017
229

2018
244

2019
260

Thereafter
9,088

Total
$
20,501

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, 2014.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

NOTE 11 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net income (loss) and all other changes in the equity of a business from transactions and other events and circumstances from non-owner sources.  These changes, other than net income (loss), are referred to as “other comprehensive income (loss)” and for the Company include primarily changes in the fair value, net of tax, of its investment securities available-for-sale and pension liability.  Other comprehensive income (loss) also includes the Company’s share of unrealized losses on hedging contracts held by the commercial finance investment partnerships and LEAF Commercial Capital, Inc. ("LEAF").        
The following are changes in accumulated other comprehensive income (loss) by category (in thousands):
 
Investment Securities
Available-for-Sale
 
Cash Flow Hedges
 
Foreign Currency
Translation Adjustments
 
SERP Pension
Liability
 
Total
Balance, December 31, 2013, net of tax of $543, $(1), $(2) and $(1,853)
801

 
(4
)
 
(2
)
 
(2,026
)
 
(1,231
)
Current-period other comprehensive income
28

 
1

 
2

 
36

 
67

Balance, March 31, 2014, net of tax of $563, $(1), $0 and $(1,819)
$
829

 
$
(3
)
 
$
—

 
$
(1,990
)
 
$
(1,164
)
 
(1)
Amounts reclassified from accumulated other comprehensive income were reflected as follows:
Category
 
Locations in the Consolidated Statement of Operations
Investment securities available-for-sale
 
Other-than-temporary impairment on investments
Cash flow hedges
 
Revenues - commercial finance
SERP pension liability
 
General and administrative expenses
Foreign currency translation adjustment
 
Other income (expense)
NOTE 12 – NONCONTROLLING INTERESTS
The following table presents the activity in noncontrolling interests (in thousands):
 
For the Three Months Ended
March 31, 2014
 
RSO
 
RAI
Noncontrolling interests, beginning of year
$
743,364

 
$
238

Net income attributable to noncontrolling interests
17,151

 
(40
)
Other comprehensive income
(28
)
 
—

Proceeds from issuance of equity interests, net
15,755

 
—

Amortization of stock-based compensation
1,666

 
—

Distributions to noncontrolling interests
(27,916
)
 
—

Other
—

 
23

Noncontrolling interests, end of period
$
749,992

 
$
221


NOTE 13 – EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share (“Basic EPS”) is computed using the weighted average number of common shares outstanding during the period, inclusive of nonvested share-based awards that are entitled to receive non-forfeitable dividends.  The diluted earnings (loss) per share (“Diluted EPS”) computation takes into account the effect of potential dilutive common shares.  Potential dilutive common shares, consisting primarily of outstanding stock options, warrants and director deferred shares, are calculated using the treasury stock method.
    

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

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,
 
2014
 
2013
Shares
 
 
 
Basic shares outstanding
20,252

 
20,124

Dilutive effect of outstanding stock options, warrants and director units
1,775

 
1,691

Dilutive shares outstanding
22,027

 
21,815

    
NOTE 14 – BENEFIT PLANS
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.  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,
 
2014
 
2013
Interest cost
$
68

 
$
60

Less: expected return on plan assets
(39
)
 
(24
)
Plus: Amortization of unrecognized loss
70

 
100

Net cost
$
99

 
$
136

NOTE 15 – CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In the ordinary course of its business operations, the Company has sponsored and manages investment entities.  Additionally, it has ongoing relationships with several related entities.  The following table details these receivables and payables (in thousands):
 
March 31, 2014
 
December 31, 2013
Loans and receivables from managed entities and related parties, net:
 
 
 
Real estate investment entities
$
24,492

 
$
21,487

Commercial finance investment entities (1)
7,838

 
8,174

Financial fund management investment entities
795

 
1,138

Other
427

 
124

Loan to LEAF I (2)
954

 
—

Receivables from managed entities and related parties
$
34,506

 
$
30,923

 
 
 
 
Payables due to managed entities and related parties, net:
 

 
 

Real estate investment entities (3) 
$
2,930

 
$
2,940

Other
182

 
170

Payables to managed entities and related parties
$
3,112

 
$
3,110

 
(1)
Net of reserves for credit losses of $37.4 million and $36.2 million, respectively, related to management fees owed from three commercial finance investment entities that, based on estimated cash distributions, are not expected to be collectible.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

(2)
Pursuant to a guarantee agreement, the Company made a payment to the lender of one of its commercial finance investment partnerships. In making the payment, the Company assumed the rights of the lender, with the resulting balance being collateralized by the portfolio of leases and loans held by the partnership (see Note 17).
(3)
Reflects $2.9 million in funds provided by the real estate investment entities, which are held by the Company to self-insure the properties held by those entities.
The Company receives fees, dividends and reimbursed expenses from several related/managed entities.  In addition, the Company reimburses related entities for certain operating expenses.  The following table details those activities (in thousands):
 
Three Months Ended
 
March 31,
 
2014
 
2013
Fees from unconsolidated investment entities:
 
 
 
Real estate (1) 
$
8,925

 
$
4,194

Financial fund management
802

 
748

Commercial finance (2) 
—

 
—

CVC Credit Partners – reimbursement of net costs and expenses
181

 
377

RRE Opportunity REIT I:
 
 
 
Reimbursement of costs and expenses
351

 
204

Dividends paid
29

 
33

RRE Opportunity REIT II:
 
 
 
Reimbursement of costs and expenses
502

 
—

LEAF:
 
 
 
Payment for sub-servicing the commercial finance investment
    partnerships
(127
)
 
(199
)
Payment for rent and related expenses
—

 
(303
)
Reimbursement of net costs and expenses
36

 
57

1845 Walnut Associates Ltd:
 
 
 
Payment for rent and related expenses
(204
)
 
(157
)
Property management fees
16

 
42

Brandywine Construction & Management, Inc. – payment for
    property management of hotel property
(40
)
 
(43
)
Atlas Energy, L.P. – reimbursement of net costs and expenses
30

 
141

Ledgewood P.C. – payment for legal services 
(24
)
 
(61
)
Graphic Images, LLC – payment for printing services
(60
)
 
(24
)
The Bancorp, Inc. – reimbursement of net costs and expenses
27

 
28

9 Henmar LLC – payment of broker/consulting fees 
(3
)
 
(3
)
 
(1)
Reflects discounts recorded by the Company of $33,000 and $133,000 recorded in the three months ended March 31, 2014 and 2013 in connection with management fees from its real estate investment entities that it expects to receive in future periods.
(2)
During the three months ended March 31, 2014 and 2013, the Company waived $224,000 and $618,000, respectively, of its fund management fees from its commercial finance investment entities.

On February 6, 2014, Opportunity REIT II commenced its initial public offering of common stock. It will focus on acquiring under-performing multifamily rental properties, distressed real estate and performing loans. Opportunity REIT II is offering up to $1.0 billion in common stock at a maximum price of $10 per share. Resource Real Estate, a subsidiary of the Company, will be the external manager. As of March 31, 2014, the Company had a $2.2 million receivable due from Opportunity REIT II.
    

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

Advances to Real Estate Limited Partnership. During 2011, the Company agreed to increase its advances to an affiliated real estate limited partnership under a revolving note to $3.0 million (from $2.0 million), bearing interest at the prime rate.  Amounts drawn, which are due upon demand, were $2.3 million as of March 31, 2014 and December 31, 2013, respectively, which are included in Loans and Receivables from Managed Entities and Related Parties, net of allowance for credit losses. The Company recorded $18,000 of interest income on this loan during the three months ended March 31, 2014 and 2013, respectively.
In February 2014, the Company loaned a non-executive employee $300,000 under a promissory note bearing interest at 3-month LIBOR plus 3%, resetting annually. Principal and interest are payable annually commencing January 15, 2015 with equal payments due on each payment date with a final maturity of January 15, 2016.
NOTE 16 – 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 as if the entities had sold the underlying properties. The assumed 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 adjusted for, current trends in the marketplace and specific changes that may be applicable to a particular property.
With respect to the commercial finance partnership receivables, the Company projects the availability of excess cash flow at the individual investment entity to repay the Company's receivable. In determining the excess cash flow, the Company starts with the gross future payments due on leases and loans for each of the funds, which are fixed and determinable, net of debt service and expected credit losses, which are estimated based on a migration analysis which is calculated based on historical data across the entire portfolio of leases and loans. This analysis estimates the likelihood that an account will progress through delinquency stages to ultimate charge-off. After an account becomes 180 or more days past due, any remaining balance is fully reserved, less an estimated recovery amount based on historical trends (currently estimated at 8.09% - 10.18%). Cash is first applied to the payoff of the underlying principal and interest on debt used to purchase the portfolios. The projected cash flows also take into consideration the receipt of other income (such as late fees or residual gains), the payment of general and administrative expenses of the funds and distributions to limited partners. The remaining excess cash is then available to repay the amounts due to the Company.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

Investment securities − equity securities. The Company uses quoted market prices to value its investments in DIF and TBBK common stock (Level 1). The Company uses the net asset value ("NAV") calculated by the independent fund administrator to value its investment in RREGP. The underlying investments in RREGP are all publicly traded securities as of March 31, 2014 (Level 2) .
Investment securities − trading securities. The Company holds four securities within its trading portfolio, two of which are debt or equity investments in externally managed CDOs, and one of which is a term loan.  
•
Two of the three CDOs are in the process of being liquidated. Accordingly, the Company has valued them based on their respective NAV, which reflects the remaining cash flows to the beneficial owners of the CDO once all obligations have been paid in full.  In performing its analysis, the Company reviews the trustee note valuation reports for CDO payments and collateral performance, and uses financial software to provide the terms of the CDO’s structure as well as market data to be used comparatively. 
For one of these positions, a 10% discount rate was applied to the NAV due to the complexity associated with its projected liquidation. The discount accounts for uncertainties such as timing of cash to be returned, unforeseen expenses of the CDO, and general compensation that an investor would look for in making such an investment (Level 3).
•
The third CDO investment is a debt position in a Euro denominated CDO. The position was valued using a discounted cash flow method, assuming a 2% constant default rate, 20% constant prepayment rate, and 30% loss severity rate.
•
The fourth loan position was valued based on recent observable trades.
Investment securities − CLO securities. The fair value of CLO securities is based on internally generated expected cash flow models that require significant management judgments and estimates due to the lack of market activity and unobservable pricing inputs. Unobservable inputs into these models include default, recovery, discount and deferral rates, prepayment speeds and reinvestment interest spreads (Level 3).
The significant unobservable inputs used in the fair value measurement of the Company's CLO securities are prepayment rates, probability of default, loss severity rate, reinvestment price on underlying collateral and the discount rate. Significant increases (decreases) in the default or discount rates in isolation would result in a significantly lower (higher) fair value measurement, whereas significant increases (decreases) in the recovery rate, prepayment rate or reinvestment price in isolation would result in a significantly higher (lower) fair value measurement.  Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the discount rate and a directionally opposite change in the assumption used for prepayment rates, recovery rates and reinvestment prices on underlying collateral. 
Investment in Apidos-CVC preferred stock and contractual commitment. The Company's investment in the Apidos-CVC preferred stock, 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).
As of March 31, 2014, the fair values of the Company’s assets recorded at fair value on a recurring basis were as follows (in thousands): 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Investment securities
$
453

 
$
675

 
$
7,972

 
$
9,100

As of December 31, 2013, the fair values of the Company’s assets recorded at fair value on a recurring basis were as follows (in thousands): 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Investment securities
$
432

 
$
—

 
$
7,407

 
$
7,839


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(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 three months ended March 31, 2014 (in thousands):
 
Investment Securities
Balance, beginning of year
$
7,407

Purchases
2,773

Income accreted
243

Payments and distributions received
(413
)
Sales
(2,185
)
Gains on sales of trading securities
188

Unrealized holding losses on trading securities
(71
)
Change in unrealized losses included in accumulated other comprehensive loss
30

Balance, end of period
$
7,972

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 year ended December 31, 2013 (in thousands):
 
Investment Securities
Balance, beginning of year
$
10,367

Purchases
11,630

Income accreted
899

Payment and distributions received
(14,058
)
Sales
(6,286
)
Impairment recognized in earnings
(214
)
Gains on sales of trading securities
6,294

Unrealized holding losses on trading securities
(1,055
)
Change in unrealized losses included in accumulated other comprehensive loss
(170
)
Balance, end of year
$
7,407

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, 2014
 
Valuation Technique
 
Unobservable Inputs
 
Assumptions
(weighted average)
CLO securities
$
6,995

 
Discounted cash flow
 
Constant default rate
 
0% - 2%
 
 
 
 
 
Loss severity rate
 
25%
 
 
 
 
 
Constant prepayment rate - year one
 
30%
 
 
 
 
 
Constant prepayment rate - year two
 
25%
 
 
 
 
 
Constant prepayment rate - thereafter
 
25%
 
 
 
 
 
Reinvestment price on collateral
 
99.875% - 100%
 
 
 
 
 
Discount rates
 
13.5%
 
 
 
 
 
 
 
 
Trading securities
$
977

 
Net asset value
 
Discount rates
 
0% - 10%
 
 
 
Discounted cash flow
 
Constant default rate
 
2%
 
 
 
 
 
Constant prepayment rate
 
20%
 
 
 
 
 
Loss severity rate
 
30%



RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(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, 2014
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Loans and receivables from managed entities – commercial finance and real estate
$
—

 
$
—

 
$
3,166

 
$
3,166

Liability:
 

 
 

 
 

 
 

Apidos contractual commitment
$
—

 
$
—

 
$
1,119

 
$
1,119

 
 
 
 
 
 
 
 
Year Ended December 31, 2013
 

 
 

 
 

 
 

Assets:
 

 
 

 
 

 
 

Loans and receivables from managed entities – commercial finance and real estate
$
—

 
$
—

 
$
4,528

 
$
4,528

Liability:
 

 
 

 
 

 
 

Apidos contractual commitment
$
—

 
$
—

 
$
995

 
$
995

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, 2014
 
December 31, 2013
 
Carrying
Amount
 
Estimated Fair Value
 
Carrying
Amount
 
Estimated Fair Value
Assets:
 
 
 
 
 
 
 
Loans and receivables from managed entities
$
34,506

 
$
34,506

 
$
30,923

 
$
30,923

 
 
 
 
 
 
 
 
Borrowings:
 

 
 

 
 

 
 

Real estate debt
$
10,236

 
$
10,957

 
$
10,287

 
$
10,702

Senior Notes
10,000

 
13,015

 
10,000

 
12,619

Other debt
265

 
265

 
332

 
332

 
$
20,501

 
$
24,237

 
$
20,619

 
$
23,653

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 approximates fair value because of its recent issuance at March 31, 2014 and December 31, 2013.


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

NOTE 17 – COMMITMENTS AND CONTINGENCIES
Limited loan guarantee. The Company and Lease Equity Appreciation Fund I, L.P. (“LEAF I”), one of its sponsored commercial finance investment partnerships, had provided a limited guarantee to a lender to LEAF I in exchange for a waiver of any existing defaulted loan covenants and certain future financial covenants and payment. On March 20, 2014, pursuant to the guarantee, the Company made a payment of $954,000 to the lender on behalf of LEAF I to pay off the loan.
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 $101,000 and $221,000 as of March 31, 2014 and December 31, 2013, respectively.  As of March 31, 2014 and December 31, 2013, Resource Securities net capital was $1.6 million and $2.7 million, respectively, which exceeded the minimum requirements by $1.5 million and $2.5 million, respectively.
Legal proceedings. 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.
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 Opportunity REIT II, the Company is committed to invest 1% of the first $100.0 million of equity raised. During 2013, the Company invested $200,000. In April 2014, the Company fully funded its commitment with an additional investment of $1.0 million.
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, 2014, except for the real estate commitment 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 18 – 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 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):

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

Three Months Ended 
 March 31, 2014
 
Real
Estate
 
Financial
Fund
Management
 
Commercial
Finance
 
All Other (1)
 
Total
RAI
 
RSO
 
Eliminations
 
Total
Consolidation
Revenues from external customers
 
$
13,630

 
$
5,990

 
$
—

 
$
—

 
$
19,620

 
$
31,931

 
$
(2,880
)
 
$
48,671

Equity in (losses) earnings of unconsolidated entities
 
(355
)
 
1,085

 
(99
)
 
—

 
631

 
—

 
—

 
631

Total revenues
 
13,275

 
7,075

 
(99
)
 
—

 
20,251

 
31,931

 
(2,880
)
 
49,302

Segment operating expenses
 
(8,875
)
 
(4,389
)
 
(103
)
 
—

 
(13,367
)
 
(13,140
)
 
2,835

 
(23,672
)
General and administrative expenses
 
(1,096
)
 
(453
)
 
—

 
(1,605
)
 
(3,154
)
 
—

 
—

 
(3,154
)
Reversal of (provision for) credit losses
 
3

 
—

 
(1,211
)
 
—

 
(1,208
)
 
—

 
—

 
(1,208
)
Depreciation and amortization
 
(308
)
 
(11
)
 
—

 
(132
)
 
(451
)
 
—

 
—

 
(451
)
Interest expense
 
(196
)
 
—

 
—

 
(287
)
 
(483
)
 
—

 
—

 
(483
)
Other income (expense), net
 
256

 
571

 
(2
)
 
(88
)
 
737

 
(1,331
)
 
(554
)
 
(1,148
)
Pretax loss (income) attributable to noncontrolling interests (2)
 
40

 
—

 
—

 
—

 
40

 
(17,151
)
 
—

 
(17,111
)
Income (loss) from continuing operations excluding noncontrolling interests before taxes
 
$
3,099

 
$
2,793

 
$
(1,415
)
 
$
(2,112
)
 
$
2,365

 
$
309

 
$
(599
)
 
$
2,075

Three Months Ended 
 March 31, 2013
 
Real
Estate
 
Financial
Fund
Management
 
Commercial
Finance
 
All
Other (1)
 
Total
RAI
 
RSO
 
Eliminations
 
Total
Consolidation
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
)
Reversal of (provision for) credit losses
 
2,522

 
—

 
(2,860
)
 
—

 
(338
)
 
—

 
—

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

 
(166
)
 
(416
)
 
—

 
—

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

 
(214
)
 
—

 
—

 
(214
)
 
—

 
—

 
(214
)
Interest expense
 
(197
)
 
—

 
(1
)
 
(296
)
 
(494
)
 
—

 
—

 
(494
)
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

Segment assets
 
Real
Estate
 
Financial
Fund
Management
 
Commercial
Finance
 
All
Other (1)
 
Total
RAI
 
RSO
 
Total
Consolidation
March 31, 2014
 
$
180,902

 
$
60,047

 
$
9,861

 
$
(82,254
)
 
$
168,556

 
$
2,341,335

 
$
2,509,891

March 31, 2013
 
$
171,771

 
$
56,908

 
$
8,507

 
$
(75,261
)
 
$
161,925

 
$
2,366,853

 
$
2,528,778

 
(1)
Includes general corporate expenses and assets not allocable to any particular segment.
(2)
In viewing its segment operations, the Company includes the pretax (income) loss attributable to noncontrolling interests.  However, these interests are excluded from (loss) income 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 CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

NOTE 19 − 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.
Consolidated VIE - RSO
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 and determined that its benefits could be significant to RSO. Accordingly, management concluded that the Company is the primary beneficiary and should consolidate RSO. However, 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 CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

The following reflects the assets and liabilities and operations of RSO which was consolidated by the Company:
RSO Balance Sheets Detail (in thousands):
 
 
 
 
March 31, 2014
 
December 31, 2013
ASSETS (1)
 
 
 
Cash and cash equivalents
$
166,686

 
$
262,270

Restricted cash
115,952

 
63,309

Subtotal- Cash and cash equivalents
282,638

 
325,579

Investment securities, trading
9,987

 
11,558

Investment securities available-for-sale, pledged as collateral, at fair value
159,051

 
162,608

Investment securities available-for-sale, at fair value
74,500

 
52,598

Subtotal - Investments, at fair value
243,538

 
226,764

Loans, pledged as collateral and net of allowances of $6.6 million and $13.8 million
1,596,731

 
1,369,526

Loans receivable–related party
6,498

 
6,966

Loans held for sale
15,389

 
21,916

Subtotal - Loans, before eliminations
1,618,618

 
1,398,408

Eliminations
(558
)
 
(950
)
Subtotal - Loans
1,618,060

 
1,397,458

Property available-for-sale
35,256

 
25,346

Investment in real estate
19,971

 
29,778

Investments in unconsolidated entities
62,053

 
69,069

Subtotal, Investments in real estate and unconsolidated entities
117,280

 
124,193

Line items included in "other assets":
 
 
 
Linked transactions, net at fair value
34,829

 
30,066

Derivatives, at fair value
556

 
—

Interest receivable
10,503

 
8,965

Deferred tax asset
5,048

 
5,212

Principal paydown receivable
1

 
6,821

Intangible assets
11,283

 
11,822

Prepaid expenses
4,155

 
2,871

Other assets
13,459

 
10,726

Subtotal - Other assets, before eliminations
79,834

 
76,483

Eliminations
(15
)
 
(16
)
Subtotal - Other assets
79,819

 
76,467

Total assets (excluding eliminations)
$
2,341,908

 
$
2,151,427

Total assets (including eliminations)
$
2,341,335

 
$
2,150,461

LIABILITIES (2)
 

 
 

Borrowings
$
1,502,089

 
$
1,319,810

Eliminations
177

 
205

Subtotal Borrowings
1,502,266

 
1,320,015

Distribution payable
27,601

 
27,023

Accrued interest expense
3,848

 
1,693

Derivatives, at fair value
10,242

 
10,586

Accrued tax liability
387

 
1,629

Deferred tax liability
4,036

 
4,112

Accounts payable and other liabilities
13,511

 
12,650

Subtotal - Other liabilities, before eliminations
59,625

 
57,693

Eliminations
(2,691
)
 
(2,446
)
Subtotal - Other liabilities
56,934

 
55,247

Total liabilities (before eliminations)
$
1,561,714

 
$
1,377,503

Total liabilities (after eliminations)
$
1,559,200

 
$
1,375,262


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)


RSO Balance Sheets Detail (in thousands):
 
 
 
 
March 31,
2014
 
December 31,
2013
(1) Assets of consolidated RSO's VIEs included in the total assets above:
 
 
 
        Restricted cash
$
113,362

 
$
61,372

        Investments securities available-for-sale, pledged as collateral, at fair value
116,429

 
105,846

        Loans held for sale
272

 
2,376

        Loans, pledged as collateral and net of allowances of $5.1 million and $8.8 million
1,305,377

 
1,219,569

        Interest receivable
6,626

 
5,627

        Prepaid expenses
163

 
247

        Principal receivable
1

 
6,821

        Total assets of consolidated VIEs
$
1,542,230

 
$
1,401,858

 
 
 
 
(2) Liabilities of consolidated RSO's VIEs included in the total liabilities above:
 
 
 
        Borrowings
$
1,183,468

 
$
1,070,339

        Accrued interest expense
1,356

 
918

        Derivatives, at fair value
9,841

 
10,191

        Accounts payable and other liabilities
4,150

 
1,604

        Total liabilities of consolidated VIEs
$
1,198,815

 
$
1,083,052

The following table presents detail of noncontrolling interests attributable to RSO:
 
March 31,
2014
 
December 31,
2013
Total stockholders' equity per RSO balance sheet
$
780,194

 
$
773,924

Eliminations
(30,202
)
 
(30,560
)
Noncontrolling interests attributable to RSO
$
749,992

 
$
743,364



RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

RSO Income Statement Detail (in thousands):
 
 
 
 
Three Months Ended
 
March 31,
 
2014
 
2013
REVENUES
 
 
 
Interest income:
 
 
 
Loans
$
20,229

 
$
27,812

Securities
4,004

 
3,642

Interest income − other
2,852

 
1,866

Total interest income
27,085

 
33,320

Interest expense
9,637

 
11,165

Net interest income
17,448

 
22,155

Rental income
5,152

 
6,174

Dividend income
136

 
16

Equity in net earnings (losses) of unconsolidated subsidiaries
2,014

 
(425
)
Fee income
2,756

 
1,410

Net realized gain on sales of investment securities available-for-sale and loans
3,680

 
391

Net realized and unrealized (loss) gain on investment securities, trading
(1,560
)
 
1,116

Unrealized gain (loss) and net interest income on linked transactions, net
2,305

 
(259
)
Revenues from consolidated VIE - RSO
31,931

 
30,578

OPERATING EXPENSES
 

 
 

Management fees − related party
3,080

 
2,978

Equity compensation − related party
1,667

 
3,591

Rental operating expense
3,396

 
3,937

General and administrative
8,105

 
3,481

Depreciation and amortization
836

 
1,138

Income tax expense
16

 
1,762

Net impairment losses recognized in earnings
—

 
21

(Benefit) provision for loan losses
(3,960
)
 
1,042

Total operating expenses
13,140

 
17,950

Reclassification of income tax expense
(16
)
 
(1,762
)
Expenses of consolidated VIE - RSO
13,124

 
16,188

Adjusted operating income
18,807

 
14,390

OTHER REVENUE (EXPENSE)
 

 
 

Other expenses
(1,262
)
 
—

Loss on the extinguishment of debt
(69
)
 
—

Other expense, net, from consolidated VIE - RSO
(1,331
)
 
—

Income from continuing operations
17,476

 
14,390

Income tax provision - RSO
16

 
1,762

NET INCOME
17,460

 
12,628

Net income allocated to preferred shares
(2,400
)
 
(1,311
)
Net income allocated to noncontrolling interests
56

 
209

NET INCOME ALLOCABLE TO RSO COMMON SHAREHOLDERS
$
15,116

 
$
11,526







RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

RSO Cash Flow Detail (in thousands)
Three Months Ended
 
March 31,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
17,460

 
$
12,628

Items included in "Change in cash attributable to consolidated VIE - RSO":
 
 
 
Provision for loan losses
(3,960
)
 
1,042

Depreciation of investments in real estate and other
392

 
666

Amortization of intangible assets
444

 
532

Amortization of term facilities
534

 
221

Accretion of net discounts on loans held for investment
(574
)
 
(4,079
)
Accretion of net discounts on securities available-for-sale
(769
)
 
(731
)
Amortization of discounts on convertible notes
422

 
—

Amortization of discount on notes of securitizations
12

 
876

Amortization of debt issuance costs on notes of securitizations
796

 
1,176

Amortization of stock-based compensation
1,667

 
3,591

Amortization of terminated derivative instruments
70

 
55

Accretion of interest-only available-for-sales securities
(137
)
 
(247
)
Deferred income tax benefits
(89
)
 
(115
)
Mortgage loans held for sale, net
(877
)
 
—

Purchase of securities, trading
—

 
(10,044
)
Principal payments on securities, trading
42

 
21

Proceeds from sales of securities, trading
—

 
3,089

Net realized and unrealized loss (gain) on investment securities, trading
1,560

 
(1,116
)
Net realized gains on sales of investment securities available-for-sale and loans
(3,680
)
 
(391
)
Loss on early extinguishment of debt
69

 
—

Net impairment losses recognized in earnings
—

 
12

      Linked Transactions fair value adjustments
(1,763
)
 
592

      Equity in net (earnings) losses of unconsolidated subsidiaries
(2,014
)
 
425

Change in operating assets and liabilities, net of acquisitions
9,563

 
15,096

Subtotal - consolidated VIE - RSO operating activity
1,708

 
10,671

Change in consolidated VIE - RSO cash for the period
95,584

 
17,617

Subtotal - Change in cash attributable to consolidated VIE - RSO before eliminations
97,292

 
28,288

Elimination of intercompany activity
(28
)
 
(654
)
Subtotal - Change in cash attributable to consolidated VIE - RSO
97,264

 
27,634

Non-cash incentive compensation to RAI
—

 
(1
)
Elimination of intercompany activity
—

 
1

Non-cash incentive compensation to RAI, after eliminations
—

 
—

Net cash provided by operating activities (excluding eliminations)
19,168

 
23,298


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

 
Three Months Ended
 
March 31,
 
2014
 
2013
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Purchase of loans
(169,380
)
 
(146,699
)
Purchase of securities available-for-sale
(48,321
)
 
(63,292
)
Subtotal - Purchase of loans and securities by consolidated VIE - RSO, before eliminations
(217,701
)
 
(209,991
)
Principal payments received on loans
90,948

 
209,107

Proceeds from sale of loans
15,974

 
58,148

Principal payments on securities available-for-sale
17,325

 
7,944

Proceeds from sale of securities available-for-sale
12,314

 
—

Subtotal - principal payments and proceeds from sales received by consolidated VIE - RSO, before eliminations
136,561

 
275,199

Increase in restricted cash
(12,849
)
 
(19,241
)
Items included in "Other -VIE, investing activity":
 
 
 
Proceeds from (investment in) unconsolidated entity
5,650

 
(4,431
)
Acquisition of Moselle CLO S.A.
(30,433
)
 
—

Distributions from investments in real estate
—

 
253

Improvements in investments in real estate
—

 
(321
)
Investment in loans - related parties
(285
)
 
—

Principal payments received on loans – related parties
753

 
464

Purchase of furniture and fixtures
(38
)
 
—

Acquisition of property and equipment
(269
)
 
—

Subtotal - Other consolidated VIE - investing activity, before eliminations
(24,622
)
 
(4,035
)
Eliminations
(391
)
 
—

Subtotal - Other consolidated VIE - investing activity
(25,013
)
 
(4,035
)
Net cash (used in) provided by investing activities (excluding eliminations)
(118,611
)
 
41,932

 
 
 
 

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

 
Three Months Ended
 
March 31,
 
2014
 
2013
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Items included in "Net borrowings (repayments) of debt by consolidated VIE - RSO"
 
 
 
Proceeds from borrowings:
 
 
 

Repurchase agreements
75,589

 
37,145

Warehouse agreements
34,007

 
—

Payments on borrowings:
 
 
 
Collateralized debt obligations
(59,668
)
 
(141,341
)
Warehouse agreements
(33,719
)
 
—

Subtotal - net (repayments) borrowings of debt by consolidated VIE - RSO
16,209

 
(104,196
)
Distributions paid on common stock
(25,536
)
 
(20,978
)
Elimination of dividends paid to RAI
572

 
556

Distribution paid on common stock, after elimination
(24,964
)
 
(20,422
)
Net proceeds from dividend reinvestment and stock purchase plan (net of offering costs of $0 and $19)
245

 
17,995

Proceeds from issuance of 8.5% Series A redeemable
preferred shares (net of offering costs of $0 and $0)
4,440

 
—

Proceeds from issuance of 8.25% Series B redeemable
preferred shares (net of offering costs of $565 and $707)
10,975

 
26,867

Subtotal - net proceeds from issuance of stock by consolidated VIE
15,660

 
44,862

Payment of debt issuance costs
(8
)
 
(140
)
Payment of equity to third party sub-note holders
(307
)
 
(1,461
)
Distributions paid on preferred stock
(2,159
)
 
(934
)
Subtotal - Other consolidated VIE - RSO financing activity, before elimination
(2,474
)
 
(2,535
)
Elimination
—

 
—

Subtotal - Other consolidated VIE - RSO financing activity after elimination
(2,474
)
 
$
(2,535
)
Net cash provided by (used in) financing activities (excluding eliminations)
$
3,859

 
$
(82,847
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
(95,584
)
 
(17,617
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
262,270

 
85,278

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
166,686

 
$
67,661

SUPPLEMENTAL DISCLOSURE:
 

 
 

Interest expense paid in cash
$
8,576

 
$
10,188

Income taxes paid in cash
$
1,774

 
$
7,635



RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

A.
Summary of Significant Accounting Policies - RSO
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 and investment securities available-for-sale are reported at fair value. To determine fair value, RSO uses an independent third-party valuation firm utilizing data available in the market 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 a prioritization of inputs used in valuation of each position, RSO categorizes these investments as either Level 2 or Level 3 in the fair value hierarchy. Any changes in fair value to RSO's investment securities, trading are recorded in RSO's consolidated statements of income as net realized and unrealized (loss) gain on investment securities, trading. Any changes in fair value to RSO's investment securities available-for-sale are recorded in RSO's consolidated balance sheets as a component of accumulated other comprehensive income (loss) in stockholders' equity.
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 RSO's consolidated statements of income.  Where other market components are believed to be the cause of the impairment, that component of the impairment is recognized as other comprehensive loss.
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:
•
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.
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.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

Allowance for Loan Loss
RSO maintains an allowance for loan loss. For RSO's bank and CRE loan portfolios, loans held for investment are first individually evaluated for impairment to determine whether a specific reserve is required. Loans that are not determined to be impaired individually 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.
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) RSO's management believes that scheduled debt service payments will not be met within the coming 12 months; (ii) the loan becomes 90 days delinquent; (iii) RSO's 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. When a loan is placed on non-accrual, previously accrued interest is reversed from interest income.
Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. RSO's management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impaired loans are carried at fair value and are measured on a nonrecurring basis. The fair value is determined using unobservable inputs including estimates of selling costs (Level 3).
For RSO's residential mortgage loans, the allowance is based upon management's review of the collectability of the loans in light of historical experience, the nature and amount of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard, or special mention. For such loans that are also identified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan are lower than the carrying value of that loan. A general component is maintained to cover uncertainties that could affect RSO management's estimate of probable losses. The general component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
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 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:

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

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 with respect to RSO's investments in real estate or intangible assets during the three months ended March 31, 2014 and 2013.
Linked Transactions
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 sheets in the 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 (loss) gain and net interest income on linked transactions, net on RSO's consolidated statements of income.
Reclassifications
Certain reclassifications have been made to RSO's 2013 consolidated financial statements to conform to the 2014 presentation.
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 such VIE should be consolidated. This analysis require 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 otherwise would have been consolidated.
Consolidated VIEs (RSO is the primary beneficiary)
Based on RSO management’s analysis, RSO is the primary beneficiary of nine VIEs at March 31, 2014: Apidos CDO I, Apidos CDO III, Apidos Cinco CDO, Apidos CLO VIII, RREF CDO 2006-1, RREF CDO 2007-1, Whitney CLO I, RCC CRE Notes 2013 and Moselle CLO. In performing the primary beneficiary analysis for seven of these VIEs (other than Whitney CLO I and Moselle CLO, which are discussed below), it was determined that the parties 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 considering the design of the VIE, the principal-agency relationship between RSO and other members of the related-party group, and the relationship and significance of the activities of the VIE to RSO compared to the other members of the related-party group..

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

These securitizations were formed on behalf of RSO (except for Whitney CLO I and Moselle CLO) to invest in real estate-related securities, Commercial Mortgage Backed Securities ("CMBS"), property available-for-sale, bank loans, corporate bonds and asset-backed securities, and were financed by the issuance of debt securities. The Manager manages these entities on behalf of RSO. By financing these assets with long-term borrowings through the issuance of 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 and is continually assessed.
Moselle CLO is a European securitization in which RSO purchased a $41.5 million interest in the form of subordinate notes representing 100% of the Class 1 Subordinated Notes and 67.9% of the Class 2 Subordinated Notes in February 2014. The CLO is managed by an independent third-party and such collateral management activities were determined to be the activities that most significantly impact the economic performance of the CLO. Though neither RSO nor one of its related parties manage the CLO, due to certain unilateral kick-out rights within the collateral management agreement, it was determined that RSO had the power to direct the activities that most significantly impact the economic performance of Moselle CLO. Having both the power to direct the activities that most significantly impact Moselle CLO and a financial interest that is expected to absorb both positive and negative variability in the CLO that could potentially be significant, RSO was determined to be the primary beneficiary of Moselle CLO and, therefore, consolidated the CLO.
Whitney CLO I is a securitization in which RSO acquired rights to manage the collateral assets held by the entity in February 2011. For a discussion on the primary beneficiary analysis for Whitney, see “- Unconsolidated VIEs - Resource Capital Asset Management,” below. For a discussion of RSO’s securitizations, see “Borrowings” 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 consolidated statements of income.
RSO has exposure to losses on its securitizations 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 securitizations, distributions with respect to its preferred equity interests. As a result of consolidation, debt and equity interests RSO holds in these securitizations have been eliminated, and RSO’s consolidated balance sheets reflects both the assets held and debt issued by the securitizations to third parties and any accrued expense to third parties. RSO's operating results and cash flows include the gross amounts related to the securitizations' assets and liabilities as opposed to RSO's net economic interests in the securitizations. Assets and liabilities related to the securitizations are disclosed, in the aggregate, on RSO's consolidated balance sheets.
The creditors of RSO’s nine 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, 2014 and 2013, RSO has provided financial support of $539,000 and $1.2 million, respectively. RSO has provided no other 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.
The following table shows the classification and carrying value of assets and liabilities of consolidated VIEs as of March 31, 2014 (in thousands):

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

 
Apidos I
 
Apidos
III
 
Apidos
Cinco
 
Apidos
VIII
 
Whitney
CLO I
 
RREF
2006
 
RREF
2007
 
RCC CRE Notes 2013
 
Moselle
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted cash (1)
$
11,951

 
$
7,217

 
$
48,362

 
$
134

 
$
160

 
$
18

 
$
250

 
$
4,805

 
$
40,465

 
$
113,362

Investment securities
available-for-sale, pledged
   as collateral, at fair value
7,250

 
3,922

 
13,940

 
—

 
—

 
9,996

 
67,015

 
—

 
14,306

 
116,429

Loans, pledged as collateral
70,988

 
112,953

 
284,373

 
—

 
—

 
159,797

 
228,686

 
298,575

 
150,005

 
1,305,377

Loans held for sale
97

 
175

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
272

Interest receivable
(193
)
 
513

 
1,044

 
—

 
6

 
1,825

 
2,111

 
1,320

 
—

 
6,626

Prepaid assets
20

 
20

 
36

 
—

 
—

 
50

 
37

 
—

 
—

 
163

Principal paydown receivable
—

 
—

 
1

 
—

 
—

 
—

 
—

 
—

 
—

 
1

Total assets (2)
$
90,113

 
$
124,800

 
$
347,756

 
$
134

 
$
166

 
$
171,686

 
$
298,099

 
$
304,700

 
$
204,776

 
$
1,542,230

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Borrowings
$
73,815

 
$
112,511

 
$
319,797

 
$
—

 
$
133

 
$
100,184

 
$
147,866

 
$
256,866

 
$
172,296

 
$
1,183,468

Accrued interest expense
255

 
56

 
299

 
—

 
—

 
48

 
115

 
205

 
378

 
1,356

Derivatives, at fair value
—

 
—

 
—

 
—

 
—

 
1,504

 
8,337

 
—

 
—

 
9,841

Accounts payable and
   other liabilities
133

 
18

 
22

 
284

 
519

 
4

 
1

 
—

 
3,169

 
4,150

Total liabilities
$
74,203

 
$
112,585

 
$
320,118

 
$
284

 
$
652

 
$
101,740

 
$
156,319

 
$
257,071

 
$
175,843

 
$
1,198,815

 
(1)
Includes $51.3 million available for reinvestment in certain of the securitizations.
(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 RSO management’s analysis, 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 financial statements as of March 31, 2014. 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 Commercial Capital, Inc. ("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, 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. RSO's resulting interest is accounted for under the equity method. During 2013, RSO entered into a third stock purchase agreement with LEAF to purchase 3,682 shares of newly issues Series A-1 Preferred Stock for $3.7 million and 4,445 shares of newly issued Series E Preferred Stock for $4.4 million. The Series E Preferred Stock has priority over all other classes of preferred stock. As of March 31, 2014, RSO's fully-diluted interest in LEAF assuming conversion is 27.5%. RSO's investment in LEAF was recorded at $40.4 million and $41.0 million as of March 31, 2014 and December 31, 2013, respectively.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(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, 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 consolidated 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 became 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 amortized over the expected life of each CLO. The unamortized balance of the intangible asset was $10.8 million and $11.2 million at March 31, 2014 and December 31, 2013, respectively. RSO recognized fee income of $1.7 million and $1.4 million for the three months ended March 31, 2014 and 2013, 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 February 2013. With respect to the fifth CLO, Whitney CLO I, in October 2012, RSO purchased 66.6% of its preferred equity. Based upon that purchase, RSO determined that it did 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 had the power to direct the activities that are most significant to the VIE. As a result, together with the related party, RSO had 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 was 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 the CLO. In September 2013, RSO liquidated Whitney CLO I, and, as a result, substantially all of the assets were sold.
The following table shows the classification, carrying value and maximum exposure to loss with respect to RSO’s unconsolidated VIEs as of March 31, 2014 (in thousands):
 
Unconsolidated Variable Interest Entities
 
 
 
LEAF
 
Unsecured Junior Subordinated Debentures
 
Resource Capital Asset Management CDOs
 
Total
 
Maximum Exposure to Loss
Investment in unconsolidated entities
$
40,421

 
$
1,548

 
$
—

 
$
41,969

 
41,969

Intangible assets
—

 
—

 
10,790

 
10,790

 
10,790

Total assets
40,421

 
1,548

 
10,790

 
52,759

 
 
 
 
 
 
 
 
 
 
 
 
Borrowings
—

 
51,054

 
—

 
51,054

 
N/A

Total liabilities
—

 
51,054

 
—

 
51,054

 
N/A

 
 
 
 
 
 
 
 
 
 
Net asset (liability)
$
40,421

 
$
(49,506
)
 
10,790

 
$
1,705

 
N/A


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

Other than RSO's commitments 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,
 
2014
 
2013
Non-cash financing activities include the following:
 
 
 

Distributions on common stock declared but not paid
$
25,663

 
$
21,634

Distribution on preferred stock declared but not paid
$
2,520

 
$
1,311

Issuance of restricted stock
$
640

 
$
35

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, 2014
 
 
 
 
 
 
 
Structured notes, trading
$
8,057

 
$
3,082

 
$
(1,590
)
 
$
9,549

RMBS
1,909

 
—

 
(1,471
)
 
438

Total
$
9,966

 
$
3,082

 
$
(3,061
)
 
$
9,987

 
 
 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

 
 

Structured notes, trading
$
8,057

 
$
4,050

 
$
(1,000
)
 
$
11,107

RMBS
1,919

 
—

 
(1,468
)
 
451

Total
$
9,976

 
$
4,050

 
$
(2,468
)
 
$
11,558

RSO did not purchase or sell securities during the three months ended March 31, 2014. RSO held eight investment securities, trading as of both March 31, 2014 and December 31, 2013.

E.
Investment securities available-for-sale - RSO
RSO pledges a portion of its CMBS as collateral against its borrowings under repurchase agreements and derivatives. 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.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

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, 2014
 
 
 
 
 
 
 
CMBS
$
186,703

 
$
7,465

 
$
(12,877
)
 
181,291

Asset-backed securities ("ABS")
35,648

 
1,519

 
(328
)
 
36,839

Structured notes
12,841

 
—

 
—

 
12,841

Corporate bonds
2,603

 
24

 
(47
)
 
2,580

Total
$
237,795

 
$
9,008

 
$
(13,252
)
 
$
233,551

 
 
 
 
 
 
 
 
December 31, 2013:
 
 
 
 
 
 
 
CMBS
$
185,178

 
$
7,570

 
$
(12,030
)
 
$
180,718

ABS
25,406

 
1,644

 
(394
)
 
26,656

Structured notes
5,369

 
—

 
—

 
5,369

Corporate bonds
2,517

 
16

 
(70
)
 
2,463

Total
$
218,470

 
$
9,230

 
$
(12,494
)
 
$
215,206

 
(1)
As of March 31, 2014 and December 31, 2013, $159.1 million and $162.6 million, respectively, of securities were pledged as collateral security under related financings.    
The following table summarizes the estimated maturities of RSO’s investment securities according to their estimated weighted average life classifications (in thousands, except percentages):
Weighted Average Life
Fair Value
 
Amortized Cost
 
Weighted Average Coupon
March 31, 2014
 
 
 
 
 
Less than one year
$
39,393

(1) 
$
49,991

 
4.31
%
Greater than one year and less than five years
138,699

 
132,935

 
5.04
%
Greater than five years and less than ten years
38,152

 
37,319

 
1.43
%
Greater than ten years
17,307

 
17,550

 
9.24
%
Total
$
233,551

 
$
237,795

 
4.64
%
 
 
 
 
 
 
December 31, 2013:
 

 
 

 
 

Less than one year
$
39,256

(1) 
$
40,931

 
5.25
%
Greater than one year and less than five years
139,700

 
141,760

 
4.69
%
Greater than five years and less than ten years
26,526

 
25,707

 
1.10
%
Greater than ten years
9,724

 
10,072

 
7.90
%
Total
$
215,206

 
$
218,470

 
4.49
%
 
(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 April 2014 to January 2025.  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 December 2015 to December 2019.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

The following table shows the fair value, gross unrealized losses and number of securities 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, except number of securities):
 
Less than 12 Months
 
More than 12 Months
 
Total
 
Fair Value
 
Gross Unrealized Losses
 
Number of Securities
 
Fair Value
 
Gross Unrealized Losses
 
Number of Securities
 
Fair Value
 
Gross Unrealized Losses
 
Number of Securities
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CMBS
$
51,979

 
$
(8,478
)
 
28

 
$
13,308

 
$
(4,399
)
 
12

 
$
65,287

 
$
(12,877
)
 
40

ABS
—

 
—

 
—

 
4,337

 
(328
)
 
8

 
4,337

 
(328
)
 
8

Corporate Bonds
—

 
—

 
—

 
891

 
(47
)
 
1

 
891

 
(47
)
 
1

Total
temporarily
impaired
securities
$
51,979

 
$
(8,478
)
 
28

 
$
18,536

 
$
(4,774
)
 
21

 
$
70,515

 
$
(13,252
)
 
49

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013:
 

 
 

 
 
 
 

 
 

 
 
 
 

 
 

 
 
CMBS
$
52,012

 
$
(7,496
)
 
34

 
$
14,159

 
$
(4,534
)
 
10

 
$
66,171

 
$
(12,030
)
 
44

ABS
143

 
(1
)
 
1

 
6,692

 
(393
)
 
9

 
6,835

 
(394
)
 
10

Corporate Bonds
865

 
(70
)
 
1

 
—

 
—

 
—

 
865

 
(70
)
 
1

Total
temporarily
impaired
securities
$
53,020

 
$
(7,567
)
 
36

 
$
20,851

 
$
(4,927
)
 
19

 
$
73,871

 
$
(12,494
)
 
55

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.
RSO performs an on-going review of third-party reports and updated financial data on the properties underlying these securities 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-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, 2014 and 2013, RSO recognized other-than-temporary impairment losses of $0 and $21,000, respectively, on positions that supported RSO's CMBS investments.
The following table summarizes RSO's sales of investment securities available-for-sale during the period indicated, (in thousands, except number of securities):

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

 
Positions
Sold
 
Par Amount Sold
 
Realized Gain (Loss)
March 31, 2014
 
 
 
 
 
CMBS position
3
 
$
12,500

 
$
(298
)
 
 
 
 
 
 
March 31, 2013
 
 
 
 
 
Corporate bond position
2
 
$
700

 
$
18


The amounts above do not include redemptions. During the three months ended March 31, 2014, RSO had one corporate bond position redeemed with a total par value of $630,000, and recognized a loss of approximately $1,000. During the three months ended March 31, 2014, RSO had one ABS position redeemed with a total par of $2.5 million, and recognized a gain of $25,500. There were no such redemptions during the three months ended March 31, 2013.
Changes in interest rates may also have an effect on the rate of principal prepayments and, as a result, prepayments on RSO’s investment portfolio. The aggregate discount (premium) due to interest rate changes were as follows (in thousands):
 
March 31,
2014
 
December 31,
2013
CMBS
$
6,170

 
$
6,583

ABS
$
2,174

 
$
2,394

Corporate bond
$
103

 
$
(68
)
F.
Investments real estate - RSO
The table below summarizes RSO's investments in real estate (in thousands, except number of properties):
 
 
As of March 31, 2014
 
As of December 31, 2013
 
 
Book Value
 
Number of Properties
 
Book Value
 
Number of Properties
Multi-family property
 
$
22,109

 
1
 
$
22,107

 
1
Office property
 
—

 
—
 
10,273

 
1
Subtotal
 
22,109

 
 
 
32,380

 
 
Less:  Accumulated depreciation
 
(2,138
)
 
 
 
(2,602
)
 
 
Investments in real estate
 
$
19,971

 
 
 
$
29,778

 
 
During the three months ended March 31, 2014, RSO made no acquisitions. RSO has two assets classified as property available-for-sale at March 31, 2014. RSO confirmed the intent and ability to sell its office property in its present condition during the three months ended March 31, 2014. This property qualified for held for sale accounting treatment upon meeting all applicable criteria on or prior to March 31, 2014, at which time depreciation and amortization were ceased. As such, the assets associated with this property, with a carrying value of $9.6 million, are separately classified and included in property available-for sale on RSO's consolidated balance sheets at March 31, 2014. However, the anticipated sale of this property did not qualify for discontinued operations and therefore, the operations for all periods presented continue to be classified within continuing operations on RSO's consolidated statements of income. RSO expects the sale to close in the next 12 months. The gain from the sale of this property will be recorded in gain on sale of real estate on RSO's consolidated statements of income. Pre-tax earnings recorded on this property for the three months ended March 31, 2014 and 2013 were losses of $16,000 and $77,000, respectively. RSO's hotel property, which was classified as available-for-sale at March 31, 2014 and December 31, 2013, sold during the second quarter of 2014.
During the year ended December 31, 2013, RSO made no acquisitions and sold one of its multi-family properties for a gain of $16.6 million, which was recorded in gain on sale of real estate on RSO's consolidated statements of income. RSO also confirmed the intent and ability to sell one of its other investments in real estate. This asset has been reclassified to property available-for-sale on RSO's consolidated balance sheets at December 31, 2013.    


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

G.
Loans held for investments - RSO
The following is a summary of RSO’s loans held for investment (in thousands):
Loan Description
 
Principal
 
Unamortized (Discount) Premium (1)
 
Carrying
Value (2)
March 31, 2014
 
 
 
 
 
 
Commercial real estate loans:
 
 

 
 

 
 

Whole loans
 
$
837,514

 
$
(3,661
)
 
$
833,853

B notes
 
16,242

 
(74
)
 
16,168

Mezzanine loans
 
64,390

 
(91
)
 
64,299

Total commercial real estate loans
 
918,146

 
(3,826
)
 
914,320

Bank loans (3) 
 
690,494

 
(3,068
)
 
687,426

Residential mortgage loans (4)
 
16,960

 
—

 
16,960

Subtotal loans before allowances
 
1,625,600

 
(6,894
)
 
1,618,706

Allowance for loan loss
 
(6,585
)
 
—

 
(6,585
)
Total
 
$
1,619,015

 
$
(6,894
)
 
$
1,612,121

 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

Commercial real estate loans:
 
 

 
 

 
 

Whole loans
 
$
749,083

 
$
(3,294
)
 
$
745,789

B notes
 
16,288

 
(83
)
 
16,205

Mezzanine loans
 
64,417

 
(100
)
 
64,317

Total commercial real estate loans
 
829,788

 
(3,477
)
 
826,311

Bank loans (3) 
 
566,056

 
(4,033
)
 
562,023

Residential mortgage loans (4)
 
16,915

 
—

 
16,915

Subtotal loans before allowances
 
1,412,759

 
(7,510
)
 
1,405,249

Allowance for loan loss
 
(13,807
)
 
—

 
(13,807
)
Total
 
$
1,398,952

 
$
(7,510
)
 
$
1,391,442

 
(1)
Amounts include deferred amendment fees of $200,000 and $216,000 and deferred upfront fees of $127,000 and $141,000 being amortized over the life of the bank loans as of March 31, 2014 and December 31, 2013, respectively.  Amounts include loan origination fees of $3.7 million and $3.3 million and loan extension fees of $62,000 and $73,000 being amortized over the life of the commercial real estate loans as of March 31, 2014 and December 31, 2013, respectively.
(2)
Substantially all loans are pledged as collateral under various borrowings at March 31, 2014 and December 31, 2013 , respectively.
(3)
Amounts include $272,000 and $6.9 million of bank loans held for sale at March 31, 2014 and December 31, 2013, respectively.
(4)
Amount includes $15.1 million and $15.0 million of residential mortgage loans held for sale at March 31, 2014 and December 31, 2013, respectively.
At March 31, 2014 and December 31, 2013, approximately 36.5% and 39%, respectively, of RSO’s commercial real estate loan portfolio was concentrated in California; approximately 10.7% and 6.4%, respectively, in Arizona; approximately 13.2% and 14.6%, respectively, in Texas. At March 31, 2014 and December 31, 2013, approximately 13.3% and 15.8%, respectively, of RSO’s bank loan portfolio was concentrated in the collective industry grouping of healthcare, education and childcare. At March 31, 2014, approximately 70% of RSO's residential mortgage loans were originated in Georgia, 10% in North Carolina, 8% in Alabama and 5% each in Tennessee and Virginia. At December 31, 2013 approximately 66% of the Company's residential mortgage loans were originated in Georgia, 9% in North Carolina, 7% each in Tennessee and Virginia and 6% in Alabama.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

At March 31, 2014, RSO’s bank loan portfolio consisted of $686.7 million (net of allowance of $741,000) of floating rate loans, which bear interest ranging between the three month LIBOR plus 0.5%, and the three month LIBOR plus 13.0% with maturity dates ranging from March 2014 to March 2024.
At December 31, 2013, RSO’s bank loan portfolio consisted of $558.6 million (net of allowance of $3.4 million) of floating rate loans, which bore interest ranging between the three month LIBOR plus 1.5%, and the three month LIBOR plus 10.5% with maturity dates ranging from January 2014 to December 2021.
The following is a summary of the weighted average life of RSO’s bank loans held for investment, at amortized cost (in thousands):
 
March 31, 2014
 
December 31, 2013
Less than one year
$
44,852

 
$
36,985

Greater than one year and less than five years
489,068

 
379,874

Five years or greater
153,506

 
145,164

 
$
687,426

 
$
562,023

The following is a summary of RSO’s commercial real estate loans held for investment (in thousands):
Description
 
Quantity
 
Amortized
Cost
 
Contracted
Interest Rates
 
Maturity
Dates (3)
March 31, 2014
 
 
 
 
 
 
 
 
Whole loans, floating rate (1) (4) (5)
 
55
 
$
833,853

 
LIBOR plus 2.13% to
LIBOR plus 12.14%
 
April 2014 to
February 2019
B notes, fixed rate
 
1
 
16,168

 
8.68%
 
April 2016
Mezzanine loans, floating rate
 
1
 
12,467

 
LIBOR plus 15.32%
 
April 2016
Mezzanine loans, fixed rate (6)
 
3
 
51,832

 
0.50% to 18.71%
 
September 2014 to
September 2021
Total (2) 
 
60
 
$
914,320

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 

 
 
 
 
Whole loans, floating rate (1) (4)
 
51
 
$
745,789

 
LIBOR plus 2.68% to
LIBOR plus 12.14%
 
March 2014 to
February 2019
B notes, fixed rate
 
1
 
16,205

 
8.68%
 
April 2016
Mezzanine loans, floating rate
 
1
 
12,455

 
LIBOR plus 15.32%
 
April 2016
Mezzanine loans, fixed rate (6)
 
3
 
51,862

 
0.50% to 18.72%
 
September 2014 to
September 2019
Total (2) 
 
56
 
$
826,311

 
 
 
 
 
(1)
Whole loans had $23.1 million and $13.7 million in unfunded loan commitments as of March 31, 2014 and December 31, 2013, respectively.  These unfunded commitments are advanced as the borrowers formally request additional funding as permitted under the loan agreement and any necessary approvals have been obtained.
(2)
The total does not include an allowance for loan loss of $5.8 million and $10.4 million as of March 31, 2014 and December 31, 2013, respectively.
(3)
Maturity dates do not include possible extension options that may be available to the borrowers.
(4)
As of March 31, 2014, floating rate whole loans includes $783,000 and $12.6 million mezzanine components of two whole loans, which have a fixed rate of 15.0% and 12.0%, respectively.
(5)
Floating rate whole loans include a $799,000 junior mezzanine tranche of a whole loan that has a fixed rate of 10.0% as of March 31, 2014.
(6)
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 18.50% which is deferred until maturity.

The following is a summary of the weighted average life of RSO’s commercial real estate loans, at amortized cost (in thousands):

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

Description
 
2014
 
2015
 
2016 and Thereafter
 
Total
March 31, 2014
 
 
 
 
 
 
 
 
B notes
 
$
—

 
$
—

 
$
16,168

 
$
16,168

Mezzanine loans
 
5,711

 
—

 
58,588

 
64,299

Whole loans
 
5,110

 
17,967

 
810,776

 
833,853

Total (1) 
 
$
10,821

 
$
17,967

 
$
885,532

 
$
914,320

 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
B notes
 
$
—

 
$
—

 
$
16,205

 
$
16,205

Mezzanine loans
 
5,711

 
—

 
58,606

 
64,317

Whole loans
 
—

 
17,949

 
727,840

 
745,789

Total (1)
 
$
5,711

 
$
17,949

 
$
802,651

 
$
826,311

 
(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, 2014
 
 
 
 
B notes
 
$
132

 
2.00%
Mezzanine loans
 
524

 
7.96%
Whole loans
 
5,188

 
78.79%
Bank loans
 
741

 
11.25%
Total
 
$
6,585

 
 
 
 
 
 
 
December 31, 2013
 
 

 
 
B notes
 
$
174

 
1.26%
Mezzanine loans
 
559

 
4.05%
Whole loans
 
9,683

 
70.13%
Bank loans
 
3,391

 
24.56%
Total
 
$
13,807

 
 
As of March 31, 2014, RSO had recorded an allowance for loan losses of $6.6 million consisting of a $741,000 allowance on RSO’s bank loan portfolio and a $5.8 million allowance on RSO’s commercial real estate portfolio as a result of the provisions taken on one bank loan as well as the maintenance of a general reserve with respect to these portfolios.  The bank loan allowance decreased $2.7 million from $3.4 million as of December 31, 2013 to $741,000 as of March 31, 2014 as a result of improved credit conditions and the write-off of three loans that were previously in specific reserve. The whole loan allowance decreased $4.5 million from $9.7 million as of December 31, 2013 to $5.2 million as of March 31, 2014 as a result of the reversal of all of the specific reserves previously taken on one commercial real estate loan that RSO expects to fully recover.

As of December 31, 2013, RSO had recorded an allowance for loan losses of $13.8 million consisting of a $3.4 million allowance on RSO’s bank loan portfolio and a $10.4 million allowance on RSO’s commercial real estate portfolio as a result of the provisions taken on three bank loans and one commercial real estate loan as well as the maintenance of a general reserve with respect to these portfolios.


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

H.
Investments in unconsolidated entities - RSO
The following table shows RSO's investments in unconsolidated entities as of March 31, 2014 and December 31, 2013 and equity in net earnings (losses) of unconsolidated subsidiaries for the three months ended March 31, 2014 and 2013 (in thousands):
 
 
 
Balance as of
 
Balance as of
 
For the three months ended
 
For the three months ended
 
Ownership %
 
March 31, 2014
 
December 31, 2013
 
March 31, 2014
 
March 31, 2013
Varde Investment Partners, L.P.
7.5%
 
$
673

 
$
674

 
$
(1
)
 
$
24

RRE VIP Borrower, LLC
3% to 5%
 
—

 
—

 
866

 
(113
)
Investment in LEAF Preferred Stock
27.5%
 
40,421

 
41,016

 
(594
)
 
(336
)
Investment in RCT I and II (1)
3%
 
1,548

 
1,548

 
(589
)
 
(593
)
Investment in Preferred Equity (2)
various
 
2,400

 
8,124

 
1,228

 
239

Investment in CVC Global Opps Fund
34.4%
 
17,011

 
16,177

 
834

 
—

Investment in Life Care Funding (3)
30%
 
—

 
1,530

 
(75
)
 
—

Total
 
 
$
62,053

 
$
69,069

 
$
1,669

 
$
(779
)
(1)
For the three months ended March 31, 2014 and 2013, these amounts are recorded in interest expense on RSO's consolidated statements of income.
(2)
For the three months ended March 31, 2014 and 2013, these amounts are recorded in interest income on loans on RSO's consolidated statements of income.
(3)
For the three months ended March 31, 2014, RSO recorded equity in net earnings (losses) of unconsolidated subsidiaries on RSO's consolidated statements of income for two months before LCF was consolidated.
In May, June and July 2013, RSO invested $15.0 million into CVC Global Credit Opportunities Fund, L.P. ("the Partnership"), a Delaware limited partnership which generally invests in assets through a master-feeder fund structure ("the Master Fund"). The General Partner of the Partnership and the Master Fund is CVC Global Credit Opportunities Fund GP, LLC, a Delaware limited liability company. The investment manager of the Partnership and the Master Fund is CVC Credit Partners, LLC ("CVC Credit Partners"). CVC Capital Partners SICAV-FIS, S.A. ("CVC"), together with its affiliates, and the Company, own a majority and a significant minority, respectively, of the investment manager. The fund pays the investment manager a quarterly management fee in advance calculated at the rate of 1.5% annually based on the balance of each limited partner's capital account. RSO's management fee was waived upon entering the agreement given that RSO is a related party of CVC Credit Partners.
In January 2013, LTCC invested $2.0 million into LCF for the purpose of originating and acquiring life settlement contracts. RSO began consolidating LCF during the three months ended March 31, 2014.
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.  RREM receives an annual asset management fee equal to 1% of outstanding contributions. For the three months ended March 31, 2014 and 2013, RSO paid RREM management fees of $0 and $16,000, respectively. All of the condominiums were sold as of December 31, 2013.
RSO's resulting interest from the November 16, 2011 formation of LEAF is accounted for under the equity method.
On December 1, 2009, RSO purchased a membership interest in RRE VIP Borrower, LLC (an unconsolidated VIE that holds an interest in a real estate joint venture) from the Company at book value. 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, 2014 and 2013, RSO paid RREM management fees of $5,000 and $8,000, respectively.
    

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

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. 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, 2014 and 2013, RSO recognized $589,000 and $593,000, respectively, of interest expense with respect to the subordinated debentures it issued to RCT I and RCT II which included $49,000 and $47,000, respectively, of amortization of deferred debt issuance costs.
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
 
Residential Mortgage Loans
 
Loans Receivable-Related Party
 
Total
March 31, 2014
 
 
 
 
 
 
 
 
 
Allowance for Loan Losses:
 
 
 
 
 
 
 
 
 
Allowance for losses at January 1, 2014
$
10,416

 
$
3,391

 
$
—

 
$
—

 
$
13,807

Provision for loan loss
(4,572
)
 
612

 
—

 
—

 
(3,960
)
Loans charged-off
—

 
(3,262
)
 
—

 
—

 
(3,262
)
Allowance for losses at March 31, 2014
$
5,844

 
$
741

 
$
—

 
$
—

 
$
6,585

Ending balance:
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
—

 
$
441

 
$
—

 
$
—

 
$
441

Collectively evaluated for impairment
$
5,844

 
$
300

 
$
—

 
$
—

 
$
6,144

Loans acquired with deteriorated credit quality
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans:
 

 
 

 
 

 
 

 
 

Ending balance:
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
196,883

 
$
1,566

 
$
—

 
$
6,498

 
$
204,947

Collectively evaluated for impairment
$
717,437

 
$
685,248

 
$
16,960

 
$
—

 
$
1,419,645

Loans acquired with deteriorated credit quality
$
—

 
$
612

 
$
—

 
$
—

 
$
612

 
 
 
 
 
 
 
 
 
 
December 31, 2013:
 

 
 

 
 

 
 

 
 

Allowance for Loan Losses:
 
 
 
 
 
 
 
 
 
Allowance for losses at January 1, 2013
$
7,986

 
$
9,705

 
$
—

 
$
—

 
$
17,691

Provision for loan loss
2,686

 
334

 
—

 
—

 
3,020

Loans charged-off
(256
)
 
(6,648
)
 
—

 
—

 
(6,904
)
Allowance for losses at December 31, 2013
$
10,416

 
$
3,391

 
$
—

 
$
—

 
$
13,807

Ending balance:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
4,572

 
$
2,621

 
$
—

 
$
—

 
$
7,193

Collectively evaluated for impairment
$
5,844

 
$
770

 
$
—

 
$
—

 
$
6,614

Loans acquired with deteriorated credit quality
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans:
 

 
 

 
 

 
 

 
 

Ending balance:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
194,403

 
$
3,554

 
$
—

 
$
6,966

 
$
204,923

Collectively evaluated for impairment
$
631,908

 
$
548,219

 
$
16,915

 
$
—

 
$
1,197,042

Loans acquired with deteriorated credit quality
$
—

 
$
—

 
$
—

 
$
—

 
$
—


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

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.
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, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank loans
$
618,896

 
$
47,742

 
$
17,340

 
$
998

 
$
2,178

 
$
272

 
$
687,426

 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2013
 

 
 

 
 

 
 

 
 

 
 

 
 

Bank loans
$
488,004

 
$
42,476

 
$
18,806

 
$
2,333

 
$
3,554

 
$
6,850

 
$
562,023

All of RSO’s bank loans were performing with the exception of one loans with an amortized cost of $1.6 million as of March 31, 2014. During the three months ended March 31, 2014, due to the consolidation of Moselle CLO, RSO acquired five loans with deteriorated credit quality with an amortized cost of $612,000. As of December 31, 2013, all of RSO’s bank loans were performing with the exception of three loans with an amortized cost of $3.6 million, one of which defaulted in 2012, one of which defaulted as of March 31, 2013, and one of which defaulted as of June 30, 2013.
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 designates loans that are sold after the period ends 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, 2014
 
 
 
 
 
 
 
 
 
 
 
Whole loans
$
768,243

 
$
32,500

 
$
33,110

 
$
—

 
$
—

 
$
833,853

B notes
16,168

 
—

 
—

 
—

 
—

 
16,168

Mezzanine loans
51,832

 
12,467

 
—

 
—

 
—

 
64,299

 
$
836,243

 
$
44,967

 
$
33,110

 
$
—

 
$
—

 
$
914,320

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2013
 

 
 

 
 

 
 

 
 

 
 

Whole loans
$
680,718

 
$
32,500

 
$
32,571

 
$
—

 
$
—

 
$
745,789

B notes
16,205

 
—

 
—

 
—

 
—

 
16,205

Mezzanine loans
51,862

 
12,455

 
—

 
—

 
—

 
64,317

 
$
748,785

 
$
44,955

 
$
32,571

 
$
—

 
$
—

 
$
826,311


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

All of RSO’s commercial real estate loans were performing as of March 31, 2014 and December 31, 2013.
Residential Mortgage Loans
Residential mortgage loans are reviewed periodically for collectability in light of historical experience, the nature and amount of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing underlying conditions. RSO also designates loans that are sold after the period ends as held for sale at the lower of their fair market value or cost.
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, 2014
 

 
 

 
 
 
 
 
 
 
 
 
 
Whole loans
$
—

 
$
—

 
$
—

 
$
—

 
$
833,853

 
$
833,853

 
$
—

B notes
—

 
—

 
—

 
—

 
16,168

 
16,168

 
—

Mezzanine loans
—

 
—

 
—

 
—

 
64,299

 
64,299

 
—

Bank loans
—

 
—

 
612

 
612

 
686,814

 
687,426

 
—

Residential mortgage loans
258

 
—

 
—

 
258

 
16,702

 
16,960

 
—

Loans receivable-related party
—

 
—

 
—

 
—

 
6,498

 
6,498

 
—

Total loans
$
258

 
$
—

 
$
612

 
$
870

 
$
1,624,334

 
$
1,625,204

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

 
 

 
 

 
 

 
 

Whole loans
$
—

 
$
—

 
$
—

 
$
—

 
$
745,789

 
$
745,789

 
$
—

B notes
—

 
—

 
—

 
—

 
16,205

 
16,205

 
—

Mezzanine loans
—

 
—

 
—

 
—

 
64,317

 
64,317

 
—

Bank loans
—

 
—

 
3,554

 
3,554

 
558,469

 
562,023

 
—

Residential mortgage loans
234

 
91

 
268

 
593

 
16,322

 
16,915

 
—

Loans receivable-related party
—

 
—

 
—

 
—

 
6,966

 
6,966

 
—

Total loans
$
234

 
$
91

 
$
3,822

 
$
4,147

 
$
1,408,068

 
$
1,412,215

 
$
—


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

Impaired Loans
The following tables show impaired loans as of the dates indicated (in thousands):
 
Recorded Balance
 
Unpaid Principal Balance
 
Specific Allowance
 
Average Investment in Impaired Loans
 
Interest Income Recognized
March 31, 2014
 
 
 
 
 
 
 
 
 
Loans without a specific valuation allowance:
 
 
 
 
 
 
 
 
 
Whole loans
$
158,811

 
$
158,811

 
$
—

 
$
156,694

 
$
12,103

B notes
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Mezzanine loans
$
38,072

 
$
38,072

 
$
—

 
$
38,072

 
$
1,916

Bank loans
$
612

 
$
612

 
$
—

 
$
—

 
$
—

Residential mortgage loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans receivable - related party
$
5,372

 
$
5,372

 
$
—

 
$
—

 
$
—

Loans with a specific valuation allowance:
 

 
 

 
 

 
 

 
 

Whole loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

B notes
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Mezzanine loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Bank loans
$
1,566

 
$
1,566

 
$
(441
)
 
$
—

 
$
—

Residential mortgage loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans receivable - related party
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
Total:
 

 
 

 
 

 
 

 
 

Whole loans
$
158,811

 
$
158,811

 
$
—

 
$
156,694

 
$
12,103

B notes
—

 
—

 
—

 
—

 
—

Mezzanine loans
38,072

 
38,072

 
—

 
38,072

 
1,916

Bank loans
2,178

 
2,178

 
(441
)
 
—

 
—

Residential mortgage loans
—

 
—

 
—

 
—

 
—

Loans receivable - related party
5,372

 
5,372

 
—

 
—

 
—

 
$
204,433

 
$
204,433

 
$
(441
)
 
$
194,766

 
$
14,019

 
Recorded Balance
 
Unpaid Principal Balance
 
Specific Allowance
 
Average Investment in Impaired Loans
 
Interest Income Recognized
December 31, 2013:
 

 
 

 
 

 
 

 
 

Loans without a specific valuation allowance:
 

 
 

 
 

 
 

 
 

Whole loans
$
130,759

 
$
130,759

 
$
—

 
$
123,495

 
$
8,439

B notes
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Mezzanine loans
$
38,072

 
$
38,072

 
$
—

 
$
38,072

 
$
1,615

Bank loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Residential mortgage loans
$
315

 
$
268

 
$
—

 
$
—

 
$
—

Loans receivable - related party
$
5,733

 
$
5,733

 
$
—

 
$
—

 
$
—

Loans with a specific valuation allowance:
 

 
 

 
 

 
 

 
 

Whole loans
$
25,572

 
$
25,572

 
$
(4,572
)
 
$
24,748

 
$
1,622

B notes
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Mezzanine loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Bank loans
$
3,554

 
$
3,554

 
$
(2,621
)
 
$
—

 
$
—

Residential mortgage loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans receivable - related party
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
Total:
 

 
 

 
 

 
 

 
 

Whole loans
$
156,331

 
$
156,331

 
$
(4,572
)
 
$
148,243

 
$
10,061

B notes
—

 
—

 
—

 
—

 
—

Mezzanine loans
38,072

 
38,072

 
—

 
38,072

 
1,615

Bank loans
3,554

 
3,554

 
(2,621
)
 
—

 
—

Residential mortgage loans
315

 
268

 
—

 
—

 
—

Loans receivable - related party
5,733

 
5,733

 
—

 
—

 
—

 
$
204,005

 
$
203,958

 
$
(7,193
)
 
$
186,315

 
$
11,676


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

Troubled- Debt Restructurings
RSO had no troubled-debt restructurings during the three months ended March 31, 2014.
The following tables show troubled-debt restructurings in RSO's loan portfolio (in thousands) during the three months ended March 31, 2013:
 
Number
of Loans
 
Pre-Modification
Outstanding
Recorded Balance
 
Post-Modification
Outstanding
Recorded Balance
Whole loans
6
 
$
153,958

 
$
136,672

B notes
—
 
—

 
—

Mezzanine loans
1
 
38,072

 
38,072

Bank loans
—
 
—

 
—

Residential mortgage loans
—
 
—

 
—

Loans receivable
1
 
7,797

 
7,797

Total loans
8
 
$
199,827

 
$
182,541

As of March 31, 2014 and 2013, 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 the preferred equity of, 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 RSO's 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 RSO's consolidated statement of income during the year ended December 31, 2012. Upon acquisition of Primary Capital Advisors, LLC ("PCA"), RSO recognized an intangible asset of $600,000 related to its wholesale-correspondent relationships, which have a finite life of approximately two years.
RSO expects to record amortization expense on intangible assets of approximately $2.1 million for the year ended December 31, 2014, $2.0 million for the year ended December 31, 2015, $1.8 million for the years ended December 31, 2016 and 2017 and $1.6 million for the year ended December 31, 2018.  The weighted average amortization period was 7.5 years and 7.7 years at March 31, 2014 and December 31, 2013, respectively and the accumulated amortization was $11.5 million and $12.5 million at March 31, 2014 and December 31, 2013, respectively.
The following table summarizes intangible assets at December 31, 2013 and 2012 (in thousands).

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

 
Asset Balance
 
Accumulated Amortization
 
Net Asset
March 31, 2014
 
 
 
 
 
Investment in RCAM
$
21,213

 
$
(10,424
)
 
$
10,789

Investments in real estate:
 

 
 

 
 

In-place leases
920

 
(920
)
 
—

Above (below) market leases
29

 
(29
)
 
—

Investment in PCA:
 
 
 
 


Wholesale or correspondent relationships
600

 
(106
)
 
494

Total intangible assets
$
22,762

 
$
(11,479
)
 
$
11,283

 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

Investment in RCAM
$
21,213

 
$
(9,980
)
 
$
11,233

Investments in real estate:
 

 
 

 
 

In-place leases
2,461

 
(2,430
)
 
31

Above (below) market leases
29

 
(29
)
 
—

Investment in PCA:
 
 
 
 
 
Wholesale or correspondent relationships
600

 
(42
)
 
558

Total intangible assets
$
24,303

 
$
(12,481
)
 
$
11,822


For the three months ended March 31, 2014 and 2013, RSO recognized $1.7 million and $1.4 million, respectively, of fee income related to the investment in RCAM.
On October 31, 2013, RSO through its taxable REIT subsidiary, RCC Residential, Inc. acquired PCA, an Atlanta based company that originates and services residential mortgage loans, for approximately $7.6 million in cash. The total incremental expenses of the acquisition including legal and other professional fees were $333,000. All legal and professional fees were expensed as incurred. RSO’s acquisition of PCA represents a return to the residential mortgage investment market by providing a residential mortgage origination platform.    
As part of this transaction, a key employee of PCA was granted approximately $800,000 of RSO’s restricted stock. The grant is accounted for as compensation and is being amortized to equity compensation expense over three years, the vesting period. Dividends declared on the stock while unvested are recorded as compensation expense. Dividends declared after the stock vests will be recorded as a distribution. For the year ended December 31, 2013, $48,000 of amortization of this stock grant was recorded to equity compensation expense on RSO's consolidated statement of income and $27,000 of compensation expense related to dividends on unvested shares was recorded to general and administrative expense on RSO’s consolidated statement of income.
The purchase price has been allocated to the assets acquired and liabilities assumed based upon RSO’s best estimate of fair value, with any shortage under the net tangible and intangible assets acquired allocated to gain on bargain purchase. The gain on bargain purchase resulted from the stock grant described above being accounted for as compensation under GAAP and was recorded as other income (expense) on RSO's consolidate statement of income.
The valuation of the identified intangibles, including wholesale and correspondent relationship assets, totaling $600,000, which relates to PCA’s operations, was determined based upon estimated net profits, after taxes, to be received as a result of those relationships. The wholesale correspondent relationships are being amortized over their estimated useful life, two years.
    

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

The following table sets forth the allocation of the purchase price as of December 31, 2013 (in thousands):
Assets acquired:
 
Cash and cash equivalents
$
1,233

Loans held for sale
15,021

Loans held for investment
2,071

Wholesale and correspondent relationships
600

Other assets
5,828

Total assets
24,753

 
 
Less: Liabilities assumed:
 
Borrowings
14,584

Other liabilities
2,165

Total liabilities
16,749

 
 
Gain on bargain purchase
391

Total cash purchase price
$
7,613

Although no further purchase price adjustments for PCA are anticipated, RSO has not yet completed the process of estimating the fair value of assets acquired and liabilities assumed on this investment. Accordingly, RSO's preliminary estimates and the allocation of the purchase price to the assets acquired and liabilities assumed may change as RSO completes the process. In accordance with FASB ASC Topic 805, changes, if any, to the preliminary estimates and allocation will be reported in RSO's consolidated financial statements, retrospectively.
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, CLOs 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, 2014 and December 31, 2013 is summarized in the following table (in thousands, except percentages):

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

 
Outstanding Borrowings
 
Unamortized Issuance Costs and Discounts
 
Principal Outstanding
 
Weighted Average Borrowing Rate
 
Weighted Average Remaining Maturity
 
Value of Collateral
 
Date Securitization Closed
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
RREF CDO 2006-1 Senior Notes
$
100,184

 
$
129

 
$
100,313

 
1.86%
 
32.4 years
 
$
169,809

 
August 2006
RREF CDO 2007-1 Senior Notes
147,866

 
509

 
148,375

 
0.91%
 
32.5 years
 
297,703

 
June 2007
RCC CRE Notes 2013
256,866

 
3,974

 
260,840

 
2.02%
 
14.7 years
 
303,410

 
December 2013
Apidos CDO I Senior Notes 
73,815

 
—

 
73,815

 
1.66%
 
3.3 years
 
88,532

 
August 2005
Apidos CDO III Senior Notes  
112,511

 
40

 
112,551

 
0.94%
 
6.5 years
 
124,677

 
May 2006
Apidos Cinco CDO Senior Notes
319,797

 
703

 
320,500

 
0.74%
 
6.1 years
 
345,029

 
May 2007
Whitney CLO I Senior Notes (1)
133

 
—

 
133

 
—%
 
N/A
 
157

 
N/A
Moselle CLO S.A. Senior Notes
167,181

 
—

 
167,181

 
0.95%
 
5.8 years
 
202,247

 
October 2005
Moselle CLO S.A. Securitized Borrowings
5,116

 
—

 
5,116

 
—%
 
N/A
 
—

 
N/A
Unsecured Junior Subordinated Debentures (2)
51,054

 
494

 
51,548

 
4.18%
 
22.6 years
 
—

 
May/Sept 2006
6.0% Convertible Senior Notes
107,130

 
7,870

 
115,000

 
6.00%
 
4.7 years
 
—

 
October 2013
CRE - Term Repurchase Facilities (3) 
99,726

 
743

 
100,469

 
2.63%
 
18 days
 
153,895

 
N/A
CMBS - Term Repurchase Facility (4)
36,819

 
—

 
36,819

 
1.37%
 
18 days
 
44,386

 
N/A
Residential Mortgage Financing Agreements
14,686

 
—

 
14,686

 
4.23%
 
147 days
 
16,728

 
N/A
CMBS - Short Term Repurchase Agreements
9,205

 
—

 
9,205

 
1.40%
 
24 days
 
13,246

 
N/A
Total
$
1,502,089

 
14,462

 
1,516,551

 
1.83%
 
10.9 years
 
$
1,759,819

 
 




RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

 
Outstanding Borrowings
 
Unamortized Issuance Costs and Discounts
 
Principal Outstanding
 
Weighted Average Borrowing Rate
 
Weighted Average Remaining Maturity
 
Value of Collateral
 
Date Securitization Closed
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
RREF CDO 2006-1 Senior Notes
$
94,004

 
$
205

 
$
94,209

 
1.87
%
 
32.6 years
 
$
169,115

 
August 2006
RREF CDO 2007-1 Senior Notes
177,837

 
719

 
178,556

 
0.84
%
 
32.8 years
 
318,933

 
June 2007
RCC CRE Notes 2013
256,571

 
4,269

 
260,840

 
2.03
%
 
15.0 years
 
305,586

 
December 2013
Apidos CDO I Senior Notes
87,131

 
—

 
87,131

 
1.68
%
 
3.6 years
 
103,736

 
August 2005
Apidos CDO III Senior Notes
133,209

 
117

 
133,326

 
0.88
%
 
6.7 years
 
145,930

 
May 2006
Apidos Cinco CDO Senior Notes
321,147

 
853

 
322,000

 
0.74
%
 
6.4 years
 
342,796

 
May 2007
Whitney CLO I Securitized Borrowings (1)
440

 
—

 
440

 
—
%
 
N/A
 
885

 
N/A
Unsecured Junior Subordinated Debentures (2)
51,005

 
543

 
51,548

 
4.19
%
 
22.8 years
 
—

 
May/Sept 2006
6.0% Convertible Senior Notes
106,535

 
8,465

 
115,000

 
6.00
%
 
4.9 years
 
—

 
October 2013
CRE - Term Repurchase Facilities (3)
29,703

 
1,033

 
30,736

 
2.67
%
 
21 days
 
48,186

 
N/A
CMBS - Term Repurchase Facility (4)
47,601

 
12

 
47,613

 
1.38
%
 
21 days
 
56,949

 
N/A
Residential Mortgage Financing Agreements
14,627

 
—

 
14,627

 
4.24
%
 
216 days
 
16,487

 
N/A
Total
$
1,319,810

 
$
16,216

 
$
1,336,026

 
1.87
%
 
13.1 years
 
$
1,508,603

 
 
 
(1)
The securitized borrowings are collateralized by the same assets as the Apidos CLO VIII Senior Notes and the Whitney CLO I Securitized Borrowings, respectively.
(2)
Amount represents junior subordinated debentures issued to RCT I and RCT II in May 2006 and September 2006, respectively.
(3)
Amount also includes accrued interest costs of $98,000 and $26,000 related to CRE repurchase facilities as of March 31, 2014 and December 31, 2013, respectively.
(4)
Amount also includes accrued interest costs of $18,000 and $22,000 related to CMBS repurchase facilities as of March 31, 2014 and December 31, 2013, respectively.


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

Securitizations
RCC CRE Notes 2013
In December 2013, RSO closed RCC CRE Notes 2013("CRE Notes 2013"), a $307.8 million CRE securitization transaction that provided financing for transitional commercial real estate loans. The investments held by CRE Notes 2013 securitized the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders. CRE Notes 2013 issued a total of $260.8 million of senior notes at par to unrelated investors. RCC Real Estate purchased 100% of the Class D senior notes (rated BBB:DBRS), Class E senior notes (rated BB:DBRS) and Class F senior notes (rated B:DBRS) for $30.0 million. In addition, RCC CRE Notes 2013 Investor, LLC, a subsidiary of RCC Real Estate, purchased a $16.9 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 CRE Notes 2013 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 CRE Notes 2013. There is no reinvestment period for CRE Notes 2013, which will result in the sequential pay down of notes as underlying collateral matures and pays down. As of March 31, 2014 and December 31, 2013, none of the notes have been paid down.
At closing, the senior notes issued to investors by CRE Notes 2013 consisted of the following classes: (i) $136.9 million of Class A notes bearing interest at one-month LIBOR plus 1.30%; (ii) $78.5 million of Class A-S notes bearing interest at one-month LIBOR plus 2.15%; (iii) $30.8 million of Class B notes bearing interest at one-month LIBOR plus 2.85%; (iv) $14.6 million of Class C notes bearing interest at one-month LIBOR plus 3.50%; (v) $13.8 million of Class D notes bearing interest at one-month LIBOR plus 4.50%; (vi) $9.2 million of Class E notes bearing interest at one-month LIBOR plus 5.50%; (vii) and $6.9 million of Class F notes bearing interest at one-month LIBOR plus 6.50%. All of the notes issued mature in December 2028, although RSO has the right to call the notes anytime after January 2016 until maturity. The weighted average interest rate on all notes issued to outside investors was 2.02% at March 31, 2014.
As a result of RSO’s ownership of senior notes, the notes retained at the CRE securitization's closing eliminate in consolidation.
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 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, 2014, $93.6 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 consist 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 allow the CDO to fund future funding obligations under the existing whole loan participations that have 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 6.423%; (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

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

anytime after July 2017 until maturity.  The weighted average interest rate on all notes issued to outside investors and net of repurchased notes was 0.91% and 0.84% at March 31, 2014 and December 31, 2013, respectively.
During the three months ended March 31, 2014 and the year ended December 31, 2013, RSO did not repurchase any notes.
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 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 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, 2014, $110.7 million of Class A-1 notes have been paid down.
The senior notes issued to investors by RREF CDO 2006-1 consist 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 5.842%; (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%.  As a result of RSO’s ownership of the Class J and K senior notes, these notes eliminate in consolidation.  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 1.86% and 1.87% at March 31, 2014 and December 31, 2013, respectively.
During the three months ended March 31, 2014 and the year ended December 31, 2013, RSO did not repurchase any notes.
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.
Moselle CLO S.A.
           In February 2014, RSO purchased 100% of the Class 1 Subordinated Notes and 67.9% of the Class 2 Subordinated Notes, which represented 88.6% of the subordinated notes in the European securitization Moselle CLO S.A. Due to RSO's economic interest combined with its contractual, unilateral kick-out rights acquired upon its purchase of a majority of the subordinate notes, RSO determined that it had a controlling financial interest and consolidated Moselle CLO.  The notes purchased by RSO are subordinated in right of payment to all other notes issued by Moselle CLO. 
               The balances of the senior notes issued to investors when RSO acquired a controlling financial interest in February 2014 were as follows: (i) €24.9 million of Class A-1E notes bearing interest at LIBOR plus 0.25% (ii) $24.9 million of Class A-1L notes bearing interest at LIBOR  plus 0.25% (iii) €10.3 million of Class A-1LE notes bearing interest at LIBOR  plus 0.31% (iv) $10.3 million of Class A-1LE USD notes bearing interest at LIBOR  plus 0.31% (v) €13.8 million of Class A-2E notes bearing interest at LIBOR  plus 0.40%: (vi) $13.8 million of Class A-2L notes bearing interest at LIBOR plus 0.40%; (vii) €6.8 million of Class A-3E notes bearing interest at LIBOR plus 0.70%; (viii) $6.8 million of Class A-3L notes bearing interest at LIBOR plus 0.75%;

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

(ix) €16.0 million of Class B-1E notes bearing interest at LIBOR plus 1.80%; and (x) $16.0 million of Class B-1L notes bearing interest at LIBOR plus 1.85%.
All notes issued mature on January 6, 2020. RSO has the right to call the notes anytime after January 6, 2010 until maturity. The weighted average interest rate on all notes was 0.95% at March 31, 2014.
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 represented 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 and as of March 31, 2014 held 68.3% of 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 2013, RSO liquidated Whitney CLO I, and as a result substantially all of the assets were sold.
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 Resource TRS III purchased a $15.0 million interest representing 43% of the outstanding subordinated debt.  The remaining 57% of subordinated debt was 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. In 2013, Apidos CLO VIII was called and liquidated and, as a result, 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 notes 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 ends 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 0.74% and 0.74% at March 31, 2014 and December 31, 2013, 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 consist 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 0.94% and 0.88% at March 31, 2014 and December 31, 2013, respectively. The reinvestment period for Apidos CDO III ended in June 2012 which results in the sequential

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

pay down of notes as underlying collateral matures and pays down.  As of March 31, 2014, $149.9 million of Class A-1 notes have been paid down.
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 consist 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 1.66% and 1.68% and at March 31, 2014 and December 31, 2013, 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, 2014, $245.7 million of Class A-1 Notes have been paid down.
During the three months ended March 31, 2014 and the year ended December 31, 2013, RSO did not repurchase any notes.
6.0% Convertible Senior Notes
On October 21, 2013, RSO issued and sold in a public offering $115.0 million aggregate principal amount of its 6.0% Convertible Senior Notes due in 2018, ("6.0% Convertible Senior Notes"). After deducting the underwriting discount and the estimated offering costs, RSO received approximately $111.1 million of net proceeds. The discount of $4.9 million on the 6.0% Convertible Senior Notes reflects the difference between the stated value of the debt and the fair value of the notes as if they were issued without a conversion feature and at a higher rate of interest that RSO estimated would have been applicable without the conversion feature. The discount will be amortized on a straight-line basis as additional interest expense through maturity on December 1, 2018. Interest on the 6.0% convertible senior notes is paid semi-annually and the 6.0% Convertible Senior Notes mature on December 1, 2018. Prior to December 1, 2018, the 6.0% Convertible Senior Notes are not redeemable at RSO's option, except to preserve RSO's status as a REIT. On or after December 1, 2018, RSO may redeem all or a portion of the 6.0% Convertible Senior Notes at a redemption price equal to the principal amount plus accrued and unpaid interest. Holders of 6.0% Convertible Senior Notes may require RSO to repurchase all or a portion of the 6.0% Convertible Senior Notes at a purchase price equal to the principal amount plus accrued and unpaid interest on December 1, 2018, or upon the occurrence of certain defined fundamental changes. The 6.0% Convertible Senior Notes are convertible at the option of the holder at a current conversion rate of 150.1502 common shares per $1,000 principal amount of 6.0% Convertible Senior Notes (equivalent to a current conversion price of $6.66 per common share). Upon conversion of 6.0% Convertible Senior Notes by a holder, the holder will receive cash, RSO common shares or a combination of cash and RSO common shares, at RSO's election.
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 $774,000 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 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.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

The debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II at March 31, 2014 were $236,000 and $258,000, respectively.  The debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II at December 31, 2013, were $261,000 and $282,000, respectively.  The rates for RCT I and RCT II, at March 31, 2014, were 4.18% and 4.19%, respectively.  The rates for RCT I and RCT II, at December 31, 2013, were 4.20% and 4.19%, 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 entities and records dividend income upon declaration by RCT I and RCT II.
Repurchase and Credit Facilities
Borrowings under the repurchase and mortgage finance facilities agreements were guaranteed by RSO or one of its subsidiaries. The following table sets forth certain information with respect to RSO's borrowings at March 31, 2014 and December 31, 2013 (dollars in thousands):
 
March 31, 2014
 
December 31, 2013
 
Outstanding Borrowings
 
Value of Collateral
 
Number of Positions as Collateral
 
Weighted Average Interest Rate
 
Outstanding Borrowings
 
Value of Collateral
 
Number of Positions as Collateral
 
Weighted Average Interest Rate
CMBS Term Repurchase Facility
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo Bank (1)
$
36,819

 
$
44,386

 
48
 
1.37%
 
$
47,601

 
$
56,949

 
44
 
1.38%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CRE Term Repurchase Facilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo Bank (2)
96,140

 
148,312

 
7
 
2.62%
 
30,003

 
48,186

 
8
 
2.67%
Deutsche Bank AG (3)
3,586

 
5,583

 
1
 
3.03%
 
(300
)
 
—

 
—
 
—%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-Term Repurchase Agreements - CMBS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo Securities, LLC
—

 
—

 
—
 
—%
 
—

 
—

 
—
 
—%
Deutsche Bank Securities, LLC
9,205

 
13,246

 
4
 
1.40%
 
—

 
—

 
—
 
—%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Mortgage Financing Agreements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New Century Bank
10,275

 
11,145

 
72
 
4.19%
 
11,916

 
13,089

 
74
 
4.17%
ViewPoint Bank, NA
4,411

 
5,584

 
25
 
4.46%
 
2,711

 
3,398

 
17
 
4.58%
Totals
$
160,436

 
$
228,256

 
 
 
 
 
$
91,931

 
$
121,622

 
 
 
 
 
(1)
The Wells Fargo CMBS term facility borrowing includes zero and $12,000 of deferred debt issuance costs as of March 31, 2014 and December 31, 2013, respectively.
(2)
The Wells Fargo CRE term repurchase facility borrowing includes $577,000 and $732,000 of deferred debt issuance costs as of March 31, 2014 and December 31, 2013, respectively.
(3)
The Deutsche Bank term repurchase facility includes $166,000 and $300,000 of deferred debt issuance costs as of March 31, 2014 and December 31, 2013, respectively.
    

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

The assets in the following table are accounted for as linked transactions. These linked repurchase agreements are not included in borrowings on RSO's consolidated balance sheets.
 
March 31, 2014
 
December 31, 2013
 
Borrowings
Under
Linked
Transactions (1)
 
Value of Collateral Under Linked Transactions
 
Number of Positions as Collateral Under Linked Transactions
 
Weighted Average Interest Rate
of Linked
Transactions
 
Borrowings
Under
Linked
Transactions (1)
 
Value of Collateral Under Linked Transactions
 
Number of Positions as Collateral Under Linked Transactions
 
Weighted Average Interest Rate
of Linked
Transactions
CMBS Term
   Repurchase
   Facility
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo Bank
$
6,156

 
$
7,994

 
7
 
1.64%
 
$
6,506

 
$
8,345

 
7
 
1.65%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CRE Term
   Repurchase
   Facility
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo Bank
—

 
—

 
—
 
—%
 
—

 
—

 
—
 
—%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-Term
   Repurchase
   Agreements -
   CMBS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
JP Morgan Securities, LLC
12,006

 
18,342

 
4
 
0.83%
 
17,020

 
24,814

 
4
 
0.99%
Wells Fargo Securities, LLC
19,621

 
27,982

 
8
 
1.19%
 
21,969

 
30,803

 
9
 
1.19%
Deutsche Bank Securities, LLC
33,883

 
51,840

 
14
 
1.41%
 
18,599

 
29,861

 
9
 
1.43%
Totals
$
71,666

 
$
106,158

 
 
 
 
 
$
64,094

 
$
93,823

 
 
 
 

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

The following table shows information about the amount at risk under the repurchase facilities (dollars in thousands):
 
Amount
at Risk (1)
 
Weighted Average Maturity in Days
 
Weighted Average Interest Rate
March 31, 2014
 
 
 
 
 
CMBS Term Repurchase Facility
 
 
 
 
 
Wells Fargo Bank, National Association (2)
$
8,822

 
18
 
1.37%
 
 
 
 
 
 
CRE Term Repurchase Facilities
 
 
 
 
 
Wells Fargo Bank, National Association
$
57,882

 
18
 
2.62%
Deutsche Bank Securities, LLC
$
9,155

 
18
 
3.03%
 
 
 
 
 
 
Short-Term Repurchase Agreements - CMBS
 
 
 
 
 
JP Morgan Securities, LLC (3)
$
6,403

 
14
 
0.83%
Wells Fargo Securities, LLC
$
8,411

 
6
 
1.19%
Deutsche Bank Securities, LLC
$
18,176

 
24
 
1.14%
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
CMBS Term Repurchase Facility
 
 
 
 
 
Wells Fargo Bank, National Association (2)
$
10,796

 
21
 
1.38%
 
 
 
 
 
 
CRE Term Repurchase Facilities
 
 
 
 
 
Wells Fargo Bank, National Association
$
20,718

 
21
 
2.67%
 
 
 
 
 
 
Short-Term Repurchase Agreements - CMBS
 
 
 
 
 
JP Morgan Securities, LLC (3)
$
7,882

 
11
 
0.99%
Wells Fargo Securities, LLC
$
8,925

 
2
 
1.19%
Deutsche Bank Securities, LLC
$
11,418

 
22
 
1.43%
 
(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)
$6.2 million and $6.5 million of linked repurchase agreement borrowings are being included as derivative instruments as of March 31, 2014 and December 31, 2013, respectively.
(3)
$12.0 million and $17.0 million of linked repurchase agreement borrowings are being included as derivative instruments as of March 31, 2014 and December 31, 2013, respectively.

CMBS - Term Repurchase Facility
In February 2011, RSO's wholly-owned subsidiaries, RCC Commercial Inc. and RCC Real Estate, Inc. (collectively, the "RCC 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 RCC Subsidiaries and Wells Fargo agree to transfer from the RCC 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 RCC Subsidiaries, with a simultaneous agreement by Wells Fargo to transfer back to the RCC Subsidiaries such Assets at a date certain or on demand, against the transfer of funds from the RCC Subsidiaries to Wells Fargo.  The maximum amount of the 2011 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 1.00% plus a 0.25% initial structuring fee and a 0.25% extension fee upon exercise. The 2011 Facility has a current maturity date of January 31, 2015. The RCC 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.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

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 RCC 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 such circumstances, Wells Fargo may require the RCC 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 RCC Subsidiaries to Wells Fargo under or in connection with the 2011 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 RCC 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 under the 2011 Facility and 2011 Guaranty as of March 31, 2014.
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 facility had a maximum amount of $150.0 million and an initial 18 month term.  RSO paid an origination fee of 37.5 basis points (0.375%). On April 12, 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 27, 2015. The amendment also provides two additional one year extension option at RCC Real Estate's discretion. RCC Real Estate paid structuring fees 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.
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 RSO 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 RSO; 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 RSO'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, 2014.
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 $200.0 million and an initial 12 month term, ending on July 19, 2014, 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. There were outstanding borrowings of $9.2 million and zero under this facility as of March 31, 2014 and December 31, 2013, respectively.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

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 require SPE 5 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 $5.0 million 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 and SPE 5 were in compliance with all debt covenants as of March 31, 2014.
Short-Term Repurchase Agreements - CMBS
On November 6, 2012, RCC Real Estate 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. Interest rates reset monthly.
On February 14, 2012, RCC Real Estate entered into a master repurchase and securities agreement with Wells Fargo Securities, LLC to finance the purchase 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.
On March 8, 2005, RCC Real Estate entered into a master repurchase and securities agreement with Deutsche Bank Securities Inc. to finance the purchase of CMBS and the origination of 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.

Residential Mortgage Financing Agreements
PCA has a master repurchase agreement with New Century Bank d/b/a Customer's Bank ("New Century") to finance the acquisition of residential mortgage loans. The facility has a maximum amount of $30.0 million and a termination date of July 2, 2014, which was amended from the original terms over the course of four amendments. At March 31, 2014, PCA had borrowed $10.3 million under this facility. The facility bears interest at one-month LIBOR plus 3.50%.
The New Century facility contains provisions that provide New Century with certain rights if certain credit events have occurred with respect to one or more assets financed on the New Century facility to require PCA 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 New Century facility, or may only be required to the extent of the availability of such payments.
The New Century 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 in the nature of PCA's business as a mortgage banker as presently conducted or a change in senior management, including the employment of two senior members of PCA's management staff; breaches of covenants and/or certain representations and warranties; performance defaults by PCA; a judgment in an amount greater than $10,000 against PCA or $50,000 in the aggregate against PCA. 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 New Century facility and the liquidation by New Century of assets then subject to the New Century facility. The agreement requires PCA to maintain a minimum maintenance balance account at all times of $1.5 million and PCA was in compliance as of March 31, 2014. PCA was in compliance with all financial debt covenants as of March 31, 2014.
    

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

PCA has a loan participation agreement with ViewPoint Bank, NA ("ViewPoint") to finance the acquisition of residential mortgage loans. The facility has a maximum amount of $15.0 million and a termination date of December 30, 2014, which was amended from the original terms over the course of five amendments. At March 31, 2014, PCA had borrowed $4.4 million. The facility bears interest at one-month LIBOR with a 4.00% floor.
The ViewPoint facility contains provisions that provide ViewPoint with certain rights if certain credit events have occurred with respect to one or more assets financed on the ViewPoint facility to require either PCA to 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 ViewPoint facility, or may only be required to the extent of the availability of such payments. The agreement requires PCA to maintain a minimum balance in a deposit account at all times of $1.0 million and PCA was in compliance as of March 31, 2014.
PCA received a waiver on a covenant due to an event of default that requires PCA to maintain consolidated net income of at least one dollar for the preceding twelve month period and not allow PCA's consolidated net income to be a negative number for three consecutive months. The waiver removed all existing defaults and waived the net income covenant requirement until September 30, 2014. PCA was in compliance with all other financial covenant requirements under the agreement as of March 31, 2014.
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 bore interest at a rate of one-month LIBOR plus 3.95%.   At December 31, 2013, there were no outstanding borrowings under this agreement as the property was sold and the underlying mortgage was repaid in 2013.

L.    Related party transactions - RSO
Relationship with LEAF. LEAF Financial originated and managed 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 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. On December 17, 2013, RSO entered into another amendment to extend the maturity to February 15, 2015. Principal payments of $361,000 were made during three months ended March 31, 2014. The loan amount outstanding at March 31, 2014 and December 31, 2013 was $5.4 million and $5.7 million, respectively.
RSO's resulting interest from the formation of LEAF is accounted for under the equity method. For the three months ended March 31, 2014 and 2013, RSO recorded a loss of $594,000 and $336,000, respectively, which was recorded in equity in net earnings (losses) of unconsolidated subsidiaries on RSO's consolidated statement of income.  RSO’s investment in LEAF was valued at $40.4 million and $41.0 million as of March 31, 2014 and December 31, 2013, respectively.
Relationship with CVC Credit Partners. On April 17, 2012, ACM, a former subsidiary of the Company, was sold to CVC Credit Partners, a joint venture entity in which the Company owns a 33% interest.  CVC Credit Partners manages internally and externally originated bank loan assets on RSO’s behalf.  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 Resource Capital Asset Management ("RCAM"). Through RCAM, RSO was initially entitled to collect senior, subordinated and incentive fees related to five CLOs holding approximately $1.9 billion in assets managed by RCAM.  RCAM is assisted by CVC Credit Partners in managing these 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, 2014 and 2013, CVC Credit Partners incurred subordinated fees of $370,000 and $181,000, respectively. In October 2012, RSO purchased

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

66.6% of the preferred equity in one of the RCAM CLOs. In May 2013, RSO purchased an additional equity interest in this CLO, increasing its ownership 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 in February 2013.
In May, June and July 2013, RSO invested a total of $15.0 million into a limited partnership agreement with CVC Global Credit Opportunities Fund, L.P. ("the Partnership"), a Delaware limited partnership which generally invests in assets through a master-feeder fund structure ("the Master Fund"). The fund will pay the investment manager a quarterly management fee in advance calculated at the rate of 1.5% annually based on the balance of each limited partner's capital account. RSO's management fee was waived upon entering the agreement given that RSO is a related party of CVC Credit Partners. For the three months ended March 31, 2014, RSO recorded earnings of $834,000, which was recorded in equity in net earnings (losses) of unconsolidated subsidiaries on RSO's consolidated statements of income. No such earnings were recorded for the three months ended March 31, 2013. The fund's investment balance of $17.0 million and $16.2 million as of March 31, 2014 and December 31, 2013, respectively, is recorded as an investment in unconsolidated entities on RSO's consolidated balance sheets using the equity method.
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, 2014 and 2013, RSO paid Ledgewood $38,000 and $46,000, respectively, in connection with legal services rendered to RSO.
M.    Fair value of financial instruments
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 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.
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 data available in the market 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 a prioritization of inputs used in the valuation of each position, RSO categorizes these investments as either Level 2 or Level 3 in the fair value hierarchy.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

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's management 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):
 
Level 1
 
Level 2
 
Level 3
 
Total
March 31, 2014
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investment securities, trading
$
—

 
$
—

 
$
9,987

 
$
9,987

Investment securities available-for-sale
1,764

 
816

 
230,971

 
233,551

CMBS - linked transactions
—

 
—

 
34,829

 
34,829

Derivatives (net)
—

 
556

 
—

 
556

Total assets at fair value
$
1,764

 
$
1,372

 
$
275,787

 
$
278,923

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Derivatives (net)
—

 
401

 
9,841

 
10,242

Total liabilities at fair value
$
—

 
$
401

 
$
9,841

 
$
10,242

 
 
 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

 
 

Assets:
 

 
 

 
 

 
 

Investment securities, trading
$
—

 
$
—

 
$
11,558

 
$
11,558

Investment securities available-for-sale
2,370

 
92

 
207,375

 
209,837

CMBS - linked transactions
—

 
—

 
30,066

 
30,066

Total assets at fair value
$
2,370

 
$
92

 
$
248,999

 
$
251,461

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Derivatives (net)
—

 
395

 
10,191

 
10,586

Total liabilities at fair value
$
—

 
$
395

 
$
10,191

 
$
10,586


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

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):
 
CMBS Including Linked Transactions
 
ABS
 
RMBS
 
Structured Finance
 
Total
Beginning balance, January 1, 2014
$
210,785

 
$
26,656

 
$
451

 
$
11,107

 
$
248,999

Total gains or losses (realized or unrealized):
 

 
 
 
 
 
 
 
 
Included in earnings
103

 
214

 
—

 
—

 
317

Purchases
33,402

 
14,306

 
—

 
12,841

 
60,549

Sales
(12,314
)
 
(2,494
)
 
—

 
—

 
(14,808
)
Paydowns
(17,188
)
 
(1,785
)
 
(10
)
 
—

 
(18,983
)
Included in OCI
1,332

 
(59
)
 
(2
)
 
(1,558
)
 
(287
)
Transfers out of Level 2
—

 
—

 
—

 
—

 
—

Transfers into level 3
—

 
—

 
—

 
—

 
—

Ending balance, March 31, 2014
$
216,120

 
$
36,838

 
$
439

 
$
22,390

 
$
275,787

RSO is not able to obtain significant observable inputs and market data points due to a change in methodology whereby RSO began using a third party valuation firm to determine fair value. As a result, $94.9 million of CMBS (including certain CMBS accounted for as linked transactions, were reclassified to Level 3 during the year ended December 31, 2013.
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, 2014                                                                                    
$
10,191

Unrealized losses – included in accumulated other comprehensive income
(350
)
Ending balance, March 31, 2014                                                                                   
$
9,841

RSO had $0 and $21,000 of losses included in earnings due to the other-than-temporary impairment charges of during the three months ended March 31, 2014 and 2013, respectively. These losses are included in RSO's consolidated statements of operations as net impairment losses recognized in earnings.
Loans held for sale consist of bank loans and 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 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 the three months ended March 31, 2014 and 2013 was $440,000 and $1.3 million, respectively, and is included in the consolidated statements of operations as provision for loan and lease losses.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

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, 2014
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Loans held for sale
$
—

 
$
272

 
$
15,117

 
$
15,389

Impaired loans
—

 
1,125

 
—

 
1,125

Total assets at fair value
$
—

 
$
1,397

 
$
15,117

 
$
16,514

 
 
 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

 
 

Assets:
 

 
 

 
 

 
 

Loans held for sale
$
—

 
$
6,850

 
$
15,066

 
$
21,916

Impaired loans
—

 
225

 
—

 
225

Total assets at fair value
$
—

 
$
7,075

 
$
15,066

 
$
22,141

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31, 2013, the significant unobservable inputs used in the fair value measurements were as follows (in thousands):
 
Fair Value at
March 31, 2014
 
Valuation Technique
 
Significant
Unobservable Inputs
 
Significant
Unobservable
Input Value
Interest rate swap agreements
$
9,841

 
Discounted cash flow
 
Weighted average credit spreads
 
5.11
%
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 the consolidated balance sheets.  The fair value of RSO’s investment securities-trading is reported in section D. "Investment securities - trading" above. The fair value of RSO’s investment securities available-for-sale is reported in section E. "Investment securities available-for-sale" above. 
Loans held-for-investment:  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 CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

The fair values of RSO’s remaining financial instruments that are not reported at fair value on the 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, 2014
 
 
 
 
 
 
 
 
 
Loans held-for-investment
$
1,596,731

 
$
1,591,875

 
$
—

 
$
687,086

 
$
904,789

Loans receivable-related party
$
6,498

 
$
6,498

 
$
—

 
$
—

 
$
6,498

CDO notes
$
1,183,469

 
$
1,066,399

 
$
—

 
$
1,066,399

 
$
—

Junior subordinated notes
$
51,054

 
$
17,548

 
$
—

 
$
—

 
$
17,548

Repurchase agreements
$
160,436

 
$
160,436

 
$
—

 
$
—

 
$
160,436

 
 
 
 
 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

 
 

 
 

Loans held-for-investment
$
1,369,526

 
$
1,358,434

 
$
—

 
$
545,352

 
$
813,082

Loans receivable-related party
$
6,966

 
$
6,966

 
$
—

 
$
—

 
$
6,966

CDO notes
$
1,070,339

 
$
653,617

 
$
—

 
$
653,617

 
$
—

Junior subordinated notes
$
51,005

 
$
17,499

 
$
—

 
$
—

 
$
17,499

Repurchase agreements
$
77,304

 
$
77,304

 
$
—

 
$
—

 
$
77,304

RAI - Other VIEs
In March 2014, the Company made a payment under a guarantee on behalf of a VIE that it does not consolidate (see Note 17). As a result of the payment, the Company re-evaluated the VIE for consolidation and determined to exclude it on the basis of immateriality to the consolidated financial statements.
VIEs not consolidated
The Company’s investments in RRE Opportunity REIT I and II and its investments in the structured finance entities that hold investments in trust preferred assets (“Trapeza entities”) and asset-backed securities (“Ischus entities”), and a new real estate investment fund that the Company sponsored and manages in Australia, RRE Global Opportunity Fund, were all determined to be VIEs that the Company does not consolidate as it does not have the obligation of, or right to, losses or earnings that would be significant to those entities.  With respect to RRE Opportunity REIT II, the Company has advanced offering costs that are being reimbursed as the REIT raises additional equity which is included in Receivables from managed entities and related parties, net on the Consolidated Balance Sheets.  Except for those advances, the Company has not provided financial or other support to these VIEs and has no liabilities, contingent liabilities, or guarantees (implicit or explicit) related to these VIEs at March 31, 2014.
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 nonconsolidated VIEs and the Company's maximum exposure to loss associated with these VIEs in which it holds variable interests at March 31, 2014 (in thousands):
 
Receivables from
Managed Entities and Related
Parties, Net (1)
 
Investments
 
Maximum Exposure
to Loss in
Non-consolidated
VIEs
RRE Opportunity REIT I
$
—

 
$
2,549

 
$
2,549

RRE Opportunity REIT II
1,649

 
200

 
1,849

Ischus entities
210

 
—

 
210

Trapeza entities
—

 
1,009

 
1,009

   RRE Global Opportunity Fund
—

 
675

 
675

 
$
1,859

 
$
4,433

 
$
6,292

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

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
MARCH 31, 2014
(unaudited)

NOTE 20 – SUBSEQUENT EVENTS    
On April 8, 2014, RSO sold its hotel property, which had been classified as property available-for-sale at December 31, 2013.
On May 1, 2014, the Company entered into a loan agreement to lend up to €2.0 million to CVC Credit Partners Group Limited, a related party. Advances on the loan bear interest at the EURIBOR plus 7% as determined on the date of each advance on the facility. The loan matures on October 1, 2014.
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
The financial information presented reflects the operations and assets of Resource Capital Corp, a publicly-traded real estate investment trust, or REIT, which we sponsored and manage (NYSE: RSO), on a consolidated basis with our operations and assets. 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 and one other segment, RSO, which is a consolidated VIE. 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, 2014, we managed $17.8 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 as well as value-added multifamily investments. In December 2013, we completed the public offering for Resource Real Estate Opportunity REIT I, having raised a total of $635.0 million (including proceeds of a private offering). 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 II, Inc., which we refer to as RRE Opportunity REIT II, during 2014.
During 2013, we launched Resource Real Estate Diversified Income Fund, or DIF, a publicly-offered, diversified, closed-end management investment company which will invest at least 80% of its assets in real estate and real estate related industry securities, primarily in income-producing equity and debt securities. During the three months ended March 31, 2014, we launched Resource Real Estate Global Property Securities, or RREGP, an Australian unregistered managed investment fund, structured as a unit trust, which we manage through a joint venture. We invested $677,400 in RREGP in March 2014.
In our financial fund management segment, we continue to focus primarily on the sponsorship and management of issuers of collateralized loan and debt obligations, or CLOs and CDOs, through our joint venture, CVC Credit Partners. Through this joint venture, we have closed nine CLOs (with a total of approximately $4.6 billion par value of assets) since its formation in 2012. In September 2013, CVC Credit Partners completed the public offering of Credit Partners European Opportunities Limited, which invests in sub-investment grade European debt instruments. The offering raised €174.7 million and £150.8 million before transaction fees and expenses. Euro denominated shares trade under the symbol "CCPE" and Sterling denominated shares trade under the symbol "CCPG" on the London Stock Exchange.
In our commercial finance segment, we recorded provisions for credit losses of $1.2 million during the three months ended March 31, 2014 on our receivables due from three of our commercial finance investment funds based on reductions in their projected cash flows. We had provided a limited guarantee to a lender of Lease Equity Appreciation Fund I, L.P., or LEAF I, one of our sponsored commercial finance investment partnerships. On March 20, 2014, pursuant to the guarantee, we made a payment of $954,000 to the lender on behalf of LEAF I to pay off the loan.
We recorded consolidated net income attributable to common shareholders of $990,000 for the three months ended March 31, 2014.


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 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 $2.5 billion to $17.8 billion at March 31, 2014 from $15.3 billion at March 31, 2013. The following table sets forth information relating to our assets under management by operating segment (in millions, except percentages) (1):
 
March 31,
 
Increase
 
2014
 
2013
 
Amount
 
Percentage
Financial fund management (2)
$
14,558

 
$
12,988

 
$
1,570

(2) 
12%
Real estate (3)
2,618

 
1,822

 
796

 
44%
Commercial finance
617

 
527

 
90

 
17%
 
$
17,793

 
$
15,337

 
$
2,456

 
16%
 
 
 
 
 
 
 
 
Net assets under management (4)
$
8,286

 
$
6,842

 
$
1,444

 
21%
 
(1)
We describe how we calculate assets under management in the notes to the third table of this section.
(2)
The increase primarily reflects the $2.2 billion increase in the CVC Credit Partners portfolio related to the issuance of four new CLOs. This increase was offset, in part, by reductions in the eligible collateral bases of our asset-backed securities, or ABS ($206.5 million), corporate loan ($188.4 million) and trust preferred portfolios ($266.4 million) resulting from defaults, paydowns, sales and calls.
(3)
The increase is primarily due to the $553.0 million increase in assets managed for RRE Opportunity REIT I; the fundraising for this fund was completed in December 2013.
(4)
Net assets under management represents the proportionate share of assets we manage after reflecting joint venture arrangements.
Our assets under management are primarily managed through various investment entities including CDOs and CLOs, public and private limited partnerships, TIC property interest programs, two REITs, and other investment funds. 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, 2014 (1)
 
 
 
 
 
 
 
Financial fund management
45
 
8
 
—
 
8
Real estate
2
 
8
 
6
 
6
Commercial finance
—
 
4
 
—
 
2
 
47
 
20
 
6
 
16
As of March 31, 2013 (1)
 
 
 
 
 
 
 
Financial fund management
44
 
13
 
—
 
3
Real estate
2
 
9
 
6
 
5
Commercial finance
—
 
4
 
—
 
2
 
46
 
26
 
6
 
10
 
(1)
All of our operating segments manage assets on behalf of RSO.


As of March 31, 2014 and 2013, we managed assets in the following classes for the accounts of institutional and individual investors, Resource Capital Corp., or RSO, and for our own account (in millions):
 
March 31, 2014
 
March 31, 2013
 
Institutional and
Individual Investors
 
RSO
 
Company
 
Total
 
Total
Bank loans (1) 
$
8,363

 
$
1,666

 
$
—

 
$
10,029

 
$
8,203

Trust preferred securities (1) 
3,269

 
—

 
—

 
3,269

 
3,536

Asset-backed securities (1) 
954

 
—

 
—

 
954

 
1,160

Mortgage and other real
estate-related loans (2)
5

 
1,284

 
—

 
1,289

 
992

Real properties (2) 
1,285

 
19

 
16

 
1,320

 
830

Commercial finance assets (3) 
617

 
—

 
—

 
617

 
527

Private equity and other assets (1) 
71

 
244

 
—

 
315

 
89

 
$
14,564

 
$
3,213

 
$
16

 
$
17,793

 
$
15,337

 
 
 
 
 
 
 
 
 
 
Net assets under management (4)
$
6,493

 
$
1,777

 
$
16

 
$
8,286

 
$
6,842

 
(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 the commercial real estate loans; and (ii) the book value of each of the following: (a) real estate and other assets held by our real estate investment entities, (b) our outstanding legacy loan portfolio, and (c) our interests in real estate.
(3)
We value our commercial finance assets as the sum of the book value of the financed equipment and leases and loans.
(4)
Net assets under management represents the proportionate share of assets we manage after reflecting joint venture arrangements.
Employees
As of March 31, 2014, we had 633 full-time employees, an increase of 25 (4%), from 608 employees at March 31, 2013. The following table summarizes our employees by operating segment:
 
Total
 
Real Estate
 
Financial Fund
Management
 
Corporate/
Other
March 31, 2014
 
 
 
 
 
 
 
Investment professionals
66
 
50
 
13
 
3
Other
85
 
29
 
11
 
45
 
151
 
79
 
24
 
48
Property management
482
 
482
 
—
 
—
Total
633
 
561
 
24
 
48
 
 
 
 
 
 
 
 
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
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,
 
2014
 
2013
Fund management revenues (1) 
$
15,269

 
$
7,968

Finance and rental revenues (2) 
1,988

 
2,005

RSO management fees (3) 
2,782

 
2,574

Gains on resolution of loans (4) 
—

 
1,606

Other revenues
212

 
1,296

Subtotal - Resource America revenues before consolidating with RSO
20,251

 
15,449

RSO - consolidated VIE revenues
31,931

 
30,578

Elimination of consolidated VIE revenues attributed to operating segments
(2,880
)
 
(2,700
)
 
$
49,302

 
$
43,327

 
(1)
Includes fees from each of our real estate, financial fund management and commercial finance operations and our share of the income or loss from limited and general partnership interests we own in our real estate, financial fund management and commercial finance operations.
(2)
Includes rental income, revenues from certain real estate assets and interest income on bank loans from our financial fund management operations.
(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.
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 three different areas:
•
the acquisition, ownership and management of portfolios of real estate and real estate related debt, which we have acquired through a sponsored real estate investment entity as well as through joint ventures with institutional investors, 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 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,
 
2014
 
2013
Assets under management (1):
 
 
 
Commercial real estate debt
$
1,235

 
$
938

Real estate investment funds and programs
569

 
582

RRE Opportunity REIT I
703

 
150

Distressed portfolios
19

 
57

Properties managed for RSO
35

 
64

Institutional portfolios
15

 
15

Residential mortgages for RSO
18

 
—

Legacy portfolio
16

 
16

DIF
8

 
—

 
$
2,618

 
$
1,822

 
 
 
 
Net assets under management
$
2,618

 
$
1,822

 


(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. Certain of our fee income is transaction based and, as such, can be highly variable. For 2014, our fee income will depend upon the success of RRE Opportunity REIT I and RRE Opportunity REIT II and the timing of their respective acquisitions, refinancings, and dispositions.
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,
 
2014
 
2013
Revenues:
 
 
 
Management fees:
 
 
 
REIT management fees from RSO
$
2,646

 
$
2,193

Property management fees
2,403

 
2,517

Asset management fees
1,942

 
1,202

Broker-dealer fees
—

 
1,108

 
6,991

 
7,020

Other:
 

 
 

Rental property income and revenues of consolidated VIEs (1)
939

 
949

Master lease revenues
1,049

 
1,056

Fee income from sponsorship of investment entities
4,651

 
689

Gains and fees on resolution of loans and other property interests
—

 
1,606

Equity in earnings of unconsolidated entities
(355
)
 
20

 
$
13,275

 
$
11,340

Costs and expenses:
 

 
 

General and administrative expenses
$
4,080

 
$
3,507

Property management expenses
2,220

 
2,355

Broker-dealer expenses
578

 
1,186

Master lease expenses
1,197

 
1,579

Rental property expenses and expenses of consolidated VIEs (1)
800

 
813

 
$
8,875

 
$
9,440

 
(1)
We generally consolidate a VIE when we are deemed to be the primary beneficiary of the entity.
Revenues − Three Months Ended March 31, 2014 as Compared to Three Months Ended March 31, 2013
Revenues from our real estate operations increased $1.9 million (17%) to $13.3 million for 2014 from $11.3 million in 2013.  We attribute the increase primarily to the following:
Management fees
•
a $740,000 increase in asset management fees, principally an $844,000 increase in the fees earned from RRE Opportunity REIT I as a result of the increase in its assets, offset in part by a $98,000 decrease in fees related to two assets sold during the quarter that were held by an RSO joint venture;
•
a $453,000 increase in RSO management fees. The base management fee increased due to an increase in the equity of RSO upon which this fee is based; and
•
a $1.1 million decrease in broker-dealer manager fees. In December 2013, we closed the offering for RRE Opportunity REIT I for which broker-dealer fees were earned during the prior year quarter.
Other revenues
•
a $4.0 million increase 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, 2014, we earned $4.7 million in fees primarily from the following activities:


•
the acquisition of two properties (valued at $114.3 million);
•
the acquisition of joint venture interests in 10 multifamily communities (valued at $51.2 million);
•
the sale of two properties (valued at $82.9 million); and
•
the placement of $115.0 of financing on properties.
•
in comparison, 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).
The increase is offset by a $1.6 million decline in gains and fees on resolution of property interests. During the three months ended March 31, 2013 we recognized a gain of $1.6 million from the sale of our 10% interest in a real estate joint venture. We had no such transactions in the three months ended March 31, 2014.
Costs and Expenses − Three Months Ended March 31, 2014 as Compared to Three Months Ended March 31, 2013
Costs and expenses of our real estate operations decreased $565,000 (6%) to $8.9 million for 2014 from $9.4 million in 2013. We attribute these changes primarily to the following:
•
a $573,000 increase in general and administrative expenses, principally a $386,000 increase in wages and benefits in conjunction with the increased operating activities of RRE Opportunity REIT I as well as the additional staffing required to manage the increased properties under management;
•
a $382,000 decrease in expenses for our master lease; and
•
a $608,000 decrease in expenses for our broker-dealer. During the three months ended March 31, 2013, we were fundraising for RRE Opportunity REIT I and completed the fundraising in December 2013. As fundraising for RRE Opportunity REIT II escalates, our broker-dealer expenses will increase.
Results of Operations:  Financial Fund Management
General. We conduct our financial fund management operations primarily through six separate operating entities:
•
CVC Credit Partners, or CCP, a joint venture between us and an unrelated third-party, finances, structures and manages investments in bank loans, high yield bonds and equity investments through CLO issuers, managed accounts and a credit opportunities fund;
•
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. TCM, together with the Trapeza CDO issuers, 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, acts as an agent in the primary and secondary markets for structured finance securities; 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, 2014
 
 
 
 
 
CVC Credit Partners
$
8,363

 
$
1,666

 
$
10,029

Trapeza
3,269

 
—

 
3,269

Ischus
954

 
—

 
954

Other
62

 
244

 
306

 
$
12,648

 
$
1,910

 
$
14,558

 
 
 
 
 
 
Net assets under management
$
5,195

 
$
473

 
$
5,668

 
 
 
 
 
 
March 31, 2013
 

 
 

 
 

CVC Credit Partners
$
5,610

 
$
2,593

 
$
8,203

Trapeza
3,536

 
—

 
3,536

Ischus
1,160

 
—

 
1,160

Other company-sponsored partnerships
66

 
23

 
89

 
$
10,372

 
$
2,616

 
$
12,988

 
 
 
 
 
 
Net assets under management
$
4,567

 
$
453

 
$
5,020

 
(1)
For information on how we calculate assets under management, see "Assets Under Management" above.
Our financial fund management operations historically have depended upon our ability to sponsor and manage CDO and CLO issuers. Prior to 2012, the market for CDOs had been non-existent and limited for CLOs in the asset classes we manage. In October 2011, we were able to sponsor Apidos CLO VIII, the first such deal we closed since 2007. Since 2012, we have closed nine CLO's (all of which were sponsored by CVC Credit Partners) financing $4.6 billion in assets.
CVC Credit Partners
We and our joint venture partner have sponsored, structured and/or currently manage 23 CLO issuers and nine separate accounts for institutional and individual investors as well as for RSO, holding approximately $10.0 billion in U.S. and European bank loans and corporate bonds ($8.5 billion of which are held in CLO issuers) at March 31, 2014, of which $1.8 billion are managed on behalf of RSO.
For the CLOs managed, we earn average fees of 0.12% (senior) and 0.26% (subordinate) of the aggregate principal balance of eligible collateral. Subordinate management fees are subordinate to debt service payments on the CLOs. Incentive management fees, which depend on performance, are also subordinate to payments on debt. During the three months ended March 31, 2014, we also received 75% of the incentive management fees generated by six legacy Apidos CLOs.
For separately managed accounts, we earn approximately 0.73% on the average balance of assets managed.
Subsequent to the sale and resulting deconsolidation of Apidos, we no longer reflect the revenues and expenses of Apidos and the credit opportunities fund in our consolidated results; instead, we record our 33% equity interest in the operations of CVC Credit Partners.
Trapeza
We sponsored, structured and currently co-manage 13 CDO issuers holding approximately $3.3 billion in trust preferred securities of banks, bank holding companies, insurance companies and other financial companies at March 31, 2014.
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 owned a 50% interest in the general partners of five affiliated limited partnerships, which are all in the process of liquidation. Additionally, as part of our sponsorship and management, we hold limited partnership interests in each of these limited partnerships. On November 1, 2009 and January 28, 2010, the general partners repurchased substantially all of the remaining limited partnership interests in two of the Trapeza entities.


On average, we earn 0.12% in senior management fees on 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 $1.0 billion in real estate ABS, including RMBS, CMBS and credit default swaps at March 31, 2014.
On average, we earn 0.07% in senior management fees on the aggregate principal balance of eligible collateral held by the CDO issuers. One of these CDO issuers no longer pays management fees.
Company-Sponsored Partnerships
We sponsored, structured and, through RFIG, currently manage seven affiliated partnerships for individual and institutional investors, which hold approximately $62.4 million of investments in financial institutions at March 31, 2014. We derive revenues from these operations through annual management fees, based on an average of 1.85% of equity. 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. The introductory agent fees we earn are negotiated on a deal-by-deal basis. In the trading portfolio we manage for our own account, we buy and sell structured finance securities and record both unrealized and realized gains and losses 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,
 
2014
 
2013
Revenues:
 
 
 
Fund management fees
$
815

 
$
733

Fund management fees - incentive
1,059

 
409

RSO management fees - trading portfolio
—

 
226

RSO management fees
136

 
155

Structuring and placement fees
3,327

 
—

Introductory agent fees
548

 
331

Equity in earnings of unconsolidated CDO issuers
243

 
227

Equity in earnings of CVC Credit Partners
361

 
582

Gains, net, on trading securities
183

 
1,276

Other revenues
242

 
20

 
6,914

 
3,959

Total limited and general partner interests
161

 
328

 
$
7,075

 
$
4,287

Costs and expenses:
 

 
 

General and administrative expenses
$
4,389

 
$
2,528

Revenues − Three Months Ended March 31, 2014 as Compared to Three Months Ended March 31, 2013
Revenues increased $2.8 million (65%) to $7.1 million for 2014 from $4.3 million in 2013. We attribute the increase to the following:
•
a $82,000 increase in fund management fees, primarily due to increased capital bases in our unconsolidated company-sponsored partnerships as a result of fair value adjustments.
•
a $650,000 increase in fund management incentive fees, reflecting payments received in connection with retaining 75% of the incentive management fees earned by the legacy Apidos CLOs;
•
a $3.3 million increase in structuring and placement fees, principally due to fees earned by Resource Capital Markets for underwriting a European CLO for an unrelated third-party collateral manager; and


•
a $217,000 increase in introductory agent fees as a result of fees earned in connection with eight structured security transactions with an average fee of $68,500 as compared to eleven structured security transactions with an average fee of $30,200 for the prior year period.
These increases were partially offset by the following decreases, which can vary significantly by quarter:
•
a $226,000 decrease in incentive management fees earned on managing a trading portfolio on behalf of RSO.
•
a $1.1 million decrease in realized and unrealized gains and interest recorded on our trading securities portfolio; and
•
a $162,000 decrease in fair value adjustments recorded for our limited general partner interests in unconsolidated company-sponsored partnerships.
Cost and Expenses − Three Months Ended March 31, 2014 as Compared to Three Months Ended March 31, 2013
    Costs and expenses of our financial fund management operations increased $1.9 million (74%) to $4.4 million for the three months ended March 31, 2014 from $2.5 million in the three months ended March 31, 2013 primarily as a result of an increase in incentive compensation in connection with the structuring and placement fees earned.
Results of Operations:  Commercial Finance
The commercial finance assets we manage through LEAF increased by $90 million to $617.0 million as compared to $527 million at March 31, 2013. This increase reflects a $168 million increase in the LEAF portfolio, offset in part by a $78 million decrease in the assets managed by our four investment partnerships, reflecting the natural runoff of those portfolios. As of March 31, 2014 and 2013, respectively, LEAF managed approximately 58,000 and 55,000 leases and loans for itself and our investment entities, with an average original finance value of $23,000 and $24,000, and an average term of 56 and 57 months, respectively.
The following table sets forth information related to commercial finance assets managed by us and LEAF, our unconsolidated joint venture (1) (in millions):
 
March 31,
 
2014
 
2013
LEAF
$
581

 
$
413

Commercial finance investment partnerships
36

 
114

 
$
617

 
$
527


(1)
For information on how we calculate assets under management, see “Assets under Management” above.
The following table sets forth certain information relating to the revenues recognized and costs and expenses incurred in our commercial finance operations (in thousands):    
 
March 31, 2014
 
2014
 
2013
Revenues:
 
 
 
  Equity in losses of investment entities
(97
)
 
(173
)
  Equity in losses of LEAF
(2
)
 
(5
)
 
$
(99
)
 
$
(178
)
Costs and expenses:
 

 
 

General and administrative expenses - wage and benefit costs
$
85

 
$
33

General and administrative expenses - other
18

 
12

 
$
103

 
$
45

During 2012, our share of LEAF's losses reduced our investment to zero such that we will not reflect any future losses of LEAF. However, we will continue to record our share of any changes that may be recorded in LEAF's accumulated other comprehensive income relating to its hedging activities.
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 $224,000 and $618,000 of fund management fees from these entities during the three months ended March 31, 2014 and 2013, respectively.



Results of Operations:  Other Costs and Expenses
General and Administrative Expenses
General and administrative costs increased $1.0 million (46%) to $3.2 million for the three months ended March 31, 2014 from $2.2 million for the three months ended March 31, 2013. Professional fees increased by $631,000 primarily due to increased audit and legal fees related to the change in our year end and the consolidation of RSO.
Other-Than-Temporary Impairment Losses
There were no other-than-temporary impairment losses during the three months ended March 31, 2014. During the three months ended March 31, 2013, we recorded $214,000 of other-than-temporary impairment losses of certain of our investments in CLOs, primarily those with investment in bank loans.
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,
 
2014
 
2013
Commercial finance:
 
 
 
Receivables from managed entities
$
1,212

 
$
2,863

Leases, loans and future payment card receivables
(1
)
 
(3
)
Real estate:
 

 
 

Receivables from managed entities
1

 
(2,533
)
Rent receivables
(4
)
 
11

 
$
1,208

 
$
338

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 $1.2 million, and $2.9 million for the three months ended March 31, 2014 and 2013, respectively.
During the three months ended March 31, 2013, 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 that was previously recorded. Additionally, due to increases in the projected cash flows of the real estate investment partnerships, we reversed another $1.5 million of our provision for credit losses.
Depreciation and Amortization
The following table reflects the depreciation reported by our operating segments (in thousands):
 
Three Months Ended March 31,
 
2014
 
2013
Real estate property investments
$
129

 
$
180

Other operating segments - primarily depreciation on fixed assets
322

 
236

Total depreciation expense
$
451

 
$
416

Interest Expense
Interest expense includes the non-cash amortization of debt issuance costs. During the three months ended March 31, 2014 and 2013, corporate interest is comprised primarily of the 9% interest on our $10.0 million of Senior Notes outstanding. Real estate segment interest primarily relates to the mortgage on our hotel property in Savannah, Georgia. The following table reflects interest expense as reported by segment (in thousands):


 
Three Months Ended March 31,
 
2014
 
2013
Corporate
$
287

 
$
296

Real estate
196

 
197

Commercial finance
—

 
1

 
$
483

 
$
494

Net (Income) Loss Attributable to Noncontrolling Interests
We record third-party interests in our earnings as amounts allocable to noncontrolling interests.  Subsequent to the deconsolidation of LEAF, we no longer record commercial finance non-controlling interests.  The following table sets forth the net (income) loss attributable to noncontrolling interests (in thousands):
 
Three Months Ended March 31,
 
2014
 
2013
Noncontrolling interests in consolidated VIE - RSO (1)
$
(17,151
)
 
$
(12,314
)
Other:
 
 
 
  Real estate - hotel property (2) 
$
30

 
$
43

  Real estate - Australian joint venture (3)
10

 
—

 
$
40

 
$
43

 
(1)
Our rights and benefits of RSO are limited to the management compensation and expense reimbursements we receive and our risks associated with being an investor in RSO which is limited to our ownership position. The remaining portion of RSO's net income (loss) is attributed to Noncontrolling interests attributable to RSO.
(2)
A related party holds a 19.99% interest in our hotel property in Savannah, Georgia.
(3)
Our Australian joint venture partner holds a 25% interest in those operations.
Income Taxes
The following table details the allocation of our consolidated provision (benefit) for income taxes from continuing operations between RAI and RSO (in thousands):
 
Three Months Ended March 31,
 
2014
 
2013
RAI
$
1,069

 
$
(146
)
RSO
16

 
1,762

Total
$
1,085

 
$
1,616

The following paragraphs discuss the income tax, exclusive of the income tax provision for our consolidated VIE - RSO.
Our effective income tax rate (income taxes as a percentage of income from continuing operations, before taxes) was a
provision of 46% for the three months ended March 31, 2014 as compared to a 26% benefit for the three months ended March 31, 2013. The change in the income tax rate primarily relates to additional tax benefits recorded for the three months ended March 31, 2013 which are not applicable for the three months ended March 31, 2014. Our effective income tax rate without discrete tax items would have been 39% for the three months ended March 31, 2014.

We project our effective tax rate to be between 42% and 45% for 2014. 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 an IRS examination for the fiscal years ended September 2011 and September 2012. In addition, we are currently undergoing a New York State examination for the fiscal years ended September 2007 - 2009. We are no longer subject to U.S. federal income tax examinations for years before 2010 and are no longer subject to state and local income tax examinations by tax authorities for years before 2007.
    


The New York State 2014-2015 Budget Act (“N.Y. Budget Act”). The N.Y. Budget Act was signed into law on March 31, 2014. The N.Y. Budget Act substantially modified and reformed various aspects of New York State tax law. We anticipate that the legislation will reduce the amount of taxable income apportioned to New York State, thereby reducing our state effective income tax rate beginning in 2015.
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 (in thousands):
 
Three Months Ended March 31,
 
2014
 
2013
Total interest income
$
27,085

 
$
33,320

Interest expense
9,637

 
11,165

Net interest income
17,448

 
22,155

Other revenues
14,483

 
8,423

Total revenues
31,931

 
30,578

Operating expenses
13,140

 
17,950

Net operating income
18,791

 
12,628

Other revenues
(1,331
)
 
—

Net income
$
17,460

 
$
12,628

Although we treat RSO as a consolidated VIE, our sole interests in it are through our management agreements as its external manager and our ownership of 2.9 million shares (2.2%) of its common stock as of March 31, 2014.
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 or the ability to utilize any of RSO's assets, nor do we have any obligation or liability with respect to any of its liabilities or borrowings.
As an asset manager, our liquidity needs consist principally of capital needed to make investments and to pay our operating expenses (principally wages, 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, 2014, our liquidity consisted of four primary sources:
•
cash on hand of $17.2 million;
•
$10.5 million of availability under 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, 2014 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 provide any assurance that we will be able to dispose of these properties or as to the timing or amounts we may realize from any such dispositions.


Refinancing and Repayment of Our Debt. In November 2013, we amended our credit facility with Republic First Bank to extend the maturity date to December 28, 2016. In April 2014, we amended our credit facility with TD Bank to extend the maturity date to December 31, 2017. In addition, the maximum borrowing capacity was increased from $7.5 million to $11.5 million.
As of March 31, 2014, our total borrowings outstanding of $20.5 million included $10.0 million of Senior Notes, $10.2 million of mortgage debt (secured by the underlying property) and $265,000 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 our cash reserves to fund dividends during periods in which our cash flows from operations were insufficient.
For the three months ended March 31, 2014 and 2013, we paid cash dividends of $980,000 and $589,000, respectively. We have paid quarterly cash dividends since August 1995. 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 that the directors deem relevant.
Contractual Obligations and Other Commercial Commitments
Our analysis of contractual obligations and other commitments excludes the obligations and commitments of our consolidated VIE - RSO as we do not have any obligation or recourse with respect to any of its liabilities or borrowings.
The following tables summarize our contractual obligations and other commercial commitments at March 31, 2014 (in thousands):
 
 
 
Payments Due By Period
 
Total
 
Less than
1 Year
 
1 – 3 
Years
 
3 – 5
Years
 
After
5 Years
Contractual obligations:
 
 
 
 
 
 
 
 
 
Non-recourse to us:
 
 
 
 
 
 
 
 
 
Mortgage - hotel property (1)
$
10,236

 
$
202

 
$
442

 
$
504

 
$
9,088

 
 
 
 
 
 
 
 
 
 
Recourse to us:
 
 
 
 
 
 
 
 
 
Other debt (1) 
10,000

 
10,000

 
—

 
—

 
—

Capital lease obligations (1) 
265

 
184

 
81

 
—

 
—

 
10,265

 
10,184

 
81

 
—

 
—

 
 
 
 
 
 
 
 
 
 
Operating lease obligations
15,004

 
2,196

 
4,285

 
3,906

 
4,617

Other long-term liabilities
6,860

 
831

 
1,576

 
1,459

 
2,994

Total contractual obligations
$
42,365

 
$
13,413

 
$
6,384

 
$
5,869

 
$
16,699

 
(1)
Not included in the table above are estimated interest payments calculated at rates in effect at March 31, 2014; less than 1 year: $1.6 million; 1-3 years:  $1.3 million; 3-5 years:  $1.2 million; and after 5 years: $1.3 million.


 
 
 
Amount of Commitment Expiration Per Period
 
Total
 
Less than
1 Year
 
1 – 3
Years
 
3 – 5
Years
 
After
5 Years
Other commercial commitments:
 
 
 
 
 
 
 
 
 
Guarantees
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Real estate commitments
800

 
800

 
—

 
—

 
—

Standby letters of credit
803

 
803

 
—

 
—

 
—

Total commercial commitments
$
1,603

 
$
1,603

 
$
—

 
$
—

 
$
—


Limited Loan Guarantee. We and Lease Equity Appreciation Fund I, L.P. (“LEAF I”), one of our sponsored commercial finance investment partnerships, had provided a limited guarantee to a lender to the LEAF partnership in exchange for a waiver of any existing defaulted loan covenants and certain future financial covenants. On March 20, 2014, pursuant to the guarantee, we advanced funds of $954,000 to the lender on behalf of LEAF I to pay off the loan in full.
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 $101,000 and $221,000 as of March 31, 2014 and December 31, 2013, respectively.  As of March 31, 2014 and December 31, 2013, Resource Securities net capital was $1.6 million and $2.7 million, respectively, which exceeded the minimum requirements by $1.5 million and $2.5 million, respectively.
Legal proceedings. We are also a party to various routine legal proceedings arising out of the ordinary course of business. Management believes that none of these actions, individually or, in the aggregate, will have a material adverse effect on our consolidated financial condition or operations.
Real Estate Commitments. As a specialized asset manager, we sponsor investment funds in which we may make an equity investment along with outside investors. This equity investment is generally based on a percentage of funds raised and varies among investment programs. With respect to RRE Opportunity REIT II, we are committed to invest 1% of the first $100.0 million of equity raised. During 2013, we invested $200,000. In April 2014, we funded an additional $1.0 million, for a total investment of $1.2 million.
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, 2014, except for the real estate commitment 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 restated 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 that we are the primary beneficiary.
The financial statements for the three months ended March 31, 2014 and 2013 reflect the consolidation of RSO. See Note 19 of the notes to our consolidated financial statements for additional disclosures pertaining to VIEs.
    


Our investment in RRE Opportunity REIT I and II, and our investments in the Trapeza structured finance entities that hold investments in trust preferred assets and asset-backed securities, which we refer to as our Ischus entities, and a new investment fund we sponsored and manage in Australia, RRE Global Opportunity Fund, 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 II, we have advanced offering costs that are being reimbursed as the REIT II 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, 2014.
Critical Accounting Policies
     The discussion and analysis of our financial condition and results of operations are based upon our restated consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues, costs and expenses, and related disclosure of contingent assets and liabilities. We make estimates of our allowance for credit losses, the valuation allowance against our deferred tax assets, discounts and collectability of management fees, the valuation of stock-based compensation, and in determining whether a decrease in the fair value of an investment is an other-than-temporary impairment. The financial fund management segment makes assumptions in determining the fair value of our investments in securities and in estimating the liability, if any, for clawback provisions on certain of our partnership interests. We used assumptions, specifically inputs to the Black-Scholes pricing model and the discounted cash flow model, in computing the fair value of the Senior Notes and related warrants. On an on-going basis, we evaluate our estimates, which are based on historical experience and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.     


ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
We are exposed to various market risks from changes in interest rates. Fluctuations in interest rates can impact our results of operations, cash flows and financial position. We manage this risk through regular operating and financing activities. The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates. The range of changes presented reflects our view of changes that are reasonably possible over a one-year period and provides indicators of how we view and manage our ongoing market risk exposures. Our analysis does not consider other possible effects that could impact our business.
Debt
At March 31, 2014, we had two secured revolving credit facilities for general business use. We only utilized one facility during 2013 for a short-term period and did not utilize either facility during the three months ended March 31, 2014. In the event that we have to utilize the facilities for longer term borrowing, the interest on the facilities would be subject to interest rate fluctuation.
All other debt as of March 31, 2014 is at fixed rates of interest and is, therefore, not subject to interest rate fluctuation.
Trading Securities
Our trading security investments are a source of market risk. As of March 31, 2014, our trading security portfolio was comprised of $977,000 of investments in equity and debt securities. Trading securities are recorded at fair value and changes in the fair value are included in operations. Assuming an immediate 10% decrease in the market value of these investments as of March 31, 2014, the hypothetical loss would have been approximately $98,000.


ITEM 4.    CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision of our chief executive officer and chief financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, and as a result of the material weakness in our internal control over financial reporting discussed in "Remediation Plan for Material Weakness in Internal Control Over Financial Reporting" 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. As we disclosed and discussed in our previously filed Form 10-Q for the three and nine month period ended September 30, 2013, we designed and formalized new documentation processes and procedures relative to the valuation of our legacy real estate investments in response to the material weakness in our internal control over financial reporting that was identified in our 2012 fiscal year. Other than these changes, there were no changes in our internal control over financial reporting during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Remediation Plan for Material Weaknesses in Internal Control Over Financial Reporting
Management has evaluated its internal control over financial reporting with respect to its determination that RSO should be consolidated and has 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 an adequate passage of time to test the adequacy and effectiveness of the controls put into place during our third quarter, management believes that the implementation of these new control processes and procedures will remediate the material weakness in its internal control over financial reporting and, as a result, its disclosure controls and procedures.



PART II. OTHER INFORMATION
ITEM 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)
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 as set forth therein. (11)
10.1(d)
 
Third Amendment to the Amended and Restated Loan and Security Agreement and Joinder, dated as of November 16, 2012, between Resource America, Inc. and TD Bank, N.A and the Joining Guarantors as set forth therein. (13)
10.1(e)
 
Fourth Amendment to the Amended and Restated Loan and Security Agreement and Joinder, dated as of April 25, 2014, among Resource America, Inc. and TD Bank, N.A and the Joining Guarantors as set forth therein. (16)
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 February 10, 2014.
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
 
Employment Agreement between Alan Feldman and Resource America, Inc., dated January 29, 2009.
10.8(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)
10.8(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)
10.8(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)
10.8(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(e)
 
Fourth Loan Modification Agreement between and among Republic First Bank (d/b/a Republic Bank) and Resource Capital Investor, Inc. and Resource Properties XXX, Inc. (13)
10.9
 
Settlement Agreement, dated January 9, 2012, by and among Raging Capital Group and Resource America, Inc. (8)
10.10
 
Sale and Purchase Agreement between Resource America, Inc. and CVC Capital Partners SICAV-FIS, S.A. dated December 29, 2011. (10)
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
 
Certification of Chief Executive Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
 
Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


99.1
 
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)
Filed 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 November 13, 2013 and by this reference incorporated herein.
(15)
Filed previously as an exhibit to our Annual Report on Form 10-K filed on March 17, 2014 and by this reference incorporated herein.
(16)
Filed previously as an exhibit to our Current Report on Form 8-K filed on April 28, 2014 and by this reference incorporated herein.


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
RESOURCE AMERICA, INC.
 
(Registrant)
 
 
 
May 12, 2014
By:
/s/ Thomas C. Elliott
 
 
THOMAS C. ELLIOTT
 
 
Senior Vice President and Chief Financial Office
 
 
 
May 12, 2014
By:
/s/ Arthur J. Miller
 
 
ARTHUR J. MILLER
 
 
Vice President and Chief Accounting Officer