10-Q 1 rexi20140930-10q.htm 10-Q REXI.2014.09.30-10Q
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 September 30, 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 November 3, 2014 was 22,857,585 shares.



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






PART I

ITEM 1.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
RESOURCE AMERICA, INC
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
September 30,
2014
 
December 31,
2013
 
(unaudited)
 
 
ASSETS
 
 
 
Cash
$
26,428

 
$
19,853

Restricted cash
704

 
571

Receivables
1,051

 
541

Loans and receivables from managed entities and related parties, net
32,637

 
30,923

Investments in real estate, net
17,091

 
17,696

Investment securities, at fair value
9,845

 
7,839

Investments in unconsolidated loan manager (see Note 8)
39,048

 
37,821

Investments in unconsolidated entities (see Note 8)
13,272

 
14,342

Assets of consolidated variable interest entity ("VIE")-RSO (see Note 19):
 
 
 
     Cash and cash equivalents (including restricted cash)
246,873

 
325,579

     Investments, at fair value
290,205

 
226,764

     Loans
1,839,895

 
1,397,458

     Investments in real estate and unconsolidated entities
90,121

 
124,193

Other assets
121,919

 
76,467

Total assets of consolidated VIE-RSO
2,589,013

 
2,150,461

 
 
 
 
Property and equipment, net
5,177

 
5,844

Deferred tax assets, net
22,808

 
27,769

Other assets
6,028

 
4,791

Total assets
$
2,763,102

 
$
2,318,451

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Accrued expenses and other liabilities
$
19,027

 
$
22,134

Payables to managed entities and related parties
3,695

 
3,110

Borrowings
20,451

 
20,619

Liabilities of consolidated VIE-RSO (see Note 19):
 
 
 
     Borrowings
1,591,241

 
1,320,015

     Other liabilities
54,842

 
55,247

Total liabilities of consolidated VIE-RSO
1,646,083

 
1,375,262

Total liabilities
1,689,256

 
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;
34,463,787 and 30,378,339 shares issued (including nonvested restricted stock of 883,830 and 400,194), respectively
334

 
299

Additional paid-in capital
307,412

 
288,555

Accumulated deficit
(24,040
)
 
(26,025
)
Treasury stock, at cost; 11,517,053 and 10,434,436 shares, respectively
(117,881
)
 
(107,874
)
Accumulated other comprehensive loss
(1,066
)
 
(1,231
)
Total stockholders’ equity
164,759

 
153,724

Noncontrolling interests
254

 
238

Noncontrolling interests attributable to consolidated VIE-RSO
908,833

 
743,364

Total equity
1,073,846

 
897,326

 
$
2,763,102

 
$
2,318,451



RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
REVENUES:
 
 
 
 
 
 
 
Real estate (includes revenues of $2,643, $4,701, $7,590 and $9,794 related to RSO)
$
14,289

 
$
15,950

 
$
41,012

 
$
39,443

Financial fund management (includes revenues of $2,310 $450, $1,350 and $720 related to RSO)
5,557

 
8,502

 
20,773

 
15,234

Commercial finance (includes no revenues related to RSO)
(17
)
 
(30
)
 
(158
)
 
(243
)
 
19,829

 
24,422

 
61,627

 
54,434

Revenues from consolidated VIE-RSO (see Note 19)
34,716

 
23,786

 
100,604

 
76,011

Elimination of consolidated VIE-RSO revenues attributed to operating segments
(4,136
)
 
(5,183
)
 
(10,056
)
 
(10,608
)
Total revenues
50,409

 
43,025

 
152,175

 
119,837

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Real estate
9,384

 
11,178

 
27,364

 
29,514

Financial fund management
2,812

 
3,547

 
9,980

 
7,769

Commercial finance
125

 
75

 
351

 
(99
)
General and administrative
2,426

 
2,505

 
8,309

 
6,807

Provision for credit losses
559

 
1,808

 
3,342

 
3,793

Depreciation and amortization
453

 
413

 
1,369

 
1,318

 
15,759

 
19,526

 
50,715

 
49,102

Expenses from consolidated VIE-RSO (see Note 19)
18,686

 
15,554

 
51,020

 
43,110

Elimination of consolidated VIE-RSO expenses attributed to
operating segments
(3,502
)
 
(4,861
)
 
(9,374
)
 
(10,178
)
Total expenses
30,943

 
30,219

 
92,361

 
82,034

OPERATING INCOME
19,466

 
12,806

 
59,814

 
37,803

 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Gain on sale of investment securities, net
69

 
—

 
439

 
—

Other-than-temporary impairment on investments
—

 
—

 
—

 
(214
)
Interest expense
(467
)
 
(530
)
 
(1,447
)
 
(1,525
)
Other income, net
80

 
128

 
263

 
400

 
(318
)
 
(402
)
 
(745
)
 
(1,339
)
Other income, net, from consolidated VIE-RSO (see Note 19)
(1,936
)
 
16,607

 
(758
)
 
16,607

Elimination of consolidated VIE-RSO other income attributed to
operating segments
11

 
162

 
29

 
224

 
(2,243
)
 
16,367

 
(1,474
)
 
15,492

Income from continuing operations before taxes
17,223

 
29,173

 
58,340

 
53,295

Income tax provision (benefit)
1,741

 
1,261

 
4,991

 
(396
)
Income tax (benefit) provision-RSO
(237
)
 
722

 
(667
)
 
4,221

Income from continuing operations
15,719

 
27,190

 
54,016

 
49,470

Loss from discontinued operations, net of tax
—

 
—

 
—

 
(2
)
Net income
15,719

 
27,190

 
54,016

 
49,468

Net loss (income) attributable to noncontrolling interests
11

 
(40
)
 
(33
)
 
(23
)
Net income attributable to noncontrolling interests of consolidated VIE-RSO
(14,214
)
 
(23,708
)
 
(48,759
)
 
(44,394
)
Net income attributable to common shareholders
$
1,516

 
$
3,442

 
$
5,224

 
$
5,051

Amounts attributable to common shareholders:
 
 
 
 
 
 
 
Income from continuing operations
$
1,516

 
$
3,442

 
$
5,224

 
$
5,053

Discontinued operations
—

 
—

 
—

 
(2
)
Net income
$
1,516

 
$
3,442

 
$
5,224

 
$
5,051

 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
Continuing operations
$
0.07

 
$
0.17

 
$
0.25

 
$
0.25

Discontinued operations
—

 
—

 
—

 
—

Net income
$
0.07

 
$
0.17

 
$
0.25

 
$
0.25

Weighted average shares outstanding
21,109

 
20,342

 
20,586

 
20,255

 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
Continuing operations
$
0.07

 
$
0.16

 
$
0.24

 
$
0.23

Discontinued operations
—

 
—

 
—

 
—

Net income
$
0.07

 
$
0.16

 
$
0.24

 
$
0.23

Weighted average shares outstanding
22,301

 
21,872

 
22,124

 
21,931


The accompanying notes are an integral part of these statements
4


RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net income
$
15,719

 
$
27,190

 
$
54,016

 
$
49,468

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 

 
 

 
 
 
 
Unrealized gains (losses) on investment securities available-for-sale, net of tax of $61, ($57), $162 and ($263)
202

 
(97
)
 
359

 
(433
)
  Less: reclassification for (gains) losses realized, net of tax of $(26), $0, $(165) and $83
(43
)
 
—

 
(274
)
 
131

 
159

 
(97
)
 
85

 
(302
)
Minimum pension liability - reclassification for losses realized, net of tax of $33, $42, $128 and $106
37

 
52

 
81

 
179

 
 
 
 
 
 
 
 
Unrealized gains on hedging contracts, net of tax of $0, $1, $0 and $7
—

 
3

 
3

 
10

 
 
 
 
 
 
 
 
Foreign currency translation losses, net of tax of $0, $0, $0 and $0
(4
)
 
—

 
(4
)
 
—

Subtotal - activity related to RAI
192

 
(42
)
 
165

 
(113
)
 
 
 
 
 
 
 
 
Activity related to consolidated VIE-RSO:
 
 
 
 
 
 
 
Reclassification adjustments for gains (losses) on available-for-sale securities realized in net income
3,974

 
396

 
8,161

 
(4,728
)
Unrealized gains on available-for-sale securities, net
8,956

 
1,723

 
7,466

 
11,644

Reclassification adjustments associated with realized losses from interest rate hedges included in net income
71

 
129

 
212

 
322

Unrealized gains on derivatives, net
1,160

 
498

 
2,351

 
2,480

Foreign currency translation gain
23

 
(23
)
 
(157
)
 
(23
)
Subtotal - activity related to consolidated VIE-RSO
14,184

 
2,723

 
18,033

 
9,695

Subtotal - other comprehensive income
14,376

 
2,681

 
18,198

 
9,582

Comprehensive income
30,095

 
29,871

 
72,214

 
59,050

Less: Comprehensive income attributable to noncontrolling interests
(28,478
)
 
(26,471
)
 
(66,927
)
 
(54,112
)
Comprehensive income attributable to common shareholders
$
1,617

 
$
3,400

 
$
5,287

 
$
4,938



The accompanying notes are an integral part of these statements
5


RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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
—

 
—

 
—

 
5,224

 
—

 
—

 
5,224

 
33

 
48,759

 
54,016

Treasury shares issued
35,633

 
—

 
(42
)
 
—

 
368

 
—

 
326

 
—

 
—

 
326

Exercise of warrants
3,444,607

 
33

 
17,535

 
—

 
(1,754
)
 
—

 
15,814

 
—

 
—

 
15,814

Stock-based compensation
640,841

 
2

 
1,364

 
—

 
—

 
—

 
1,366

 
—

 
—

 
1,366

Repurchase of common stock
(1,118,250
)
 
—

 
—

 
—

 
(8,621
)
 
—

 
(8,621
)
 
—

 
—

 
(8,621
)
Dividends on common stock
—

 
—

 
—

 
(3,239
)
 
—

 
—

 
(3,239
)
 
—

 
—

 
(3,239
)
Change in noncontrolling interests in consolidated VIE-RSO
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
98,677

 
98,677

Other
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(17
)
 


 
(17
)
Other comprehensive income
—

 
—

 
—

 
—

 
—

 
165

 
165

 
—

 
18,033

 
18,198

Balance, September 30, 2014
22,946,734

 
$
334

 
$
307,412

 
$
(24,040
)
 
$
(117,881
)
 
$
(1,066
)
 
$
164,759

 
$
254

 
$
908,833

 
$
1,073,846

 

The accompanying notes are an integral part of these statements
6


RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended
 
September 30,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
54,016

 
$
49,468

Adjustments to reconcile net income to net cash used in operating activities:
 

 
 

Depreciation and amortization
1,469

 
1,462

Provision for credit losses
3,342

 
3,793

Unrealized (losses) gains on trading securities
111

 
(774
)
Equity in earnings of unconsolidated entities
(2,298
)
 
(2,528
)
Distributions from unconsolidated entities
5,134

 
3,099

Gain on sale of leases and loans
(22
)
 
—

Other-than-temporary impairment on investments
—

 
214

Gain on sale of investment securities, net
(1,845
)
 
(4,551
)
Losses (gains) on sales of assets
439

 
(1,632
)
Deferred income tax provision (benefit)
4,838

 
(254
)
Equity-based compensation issued
1,322

 
942

Trading securities purchases and sales, net
973

 
6,445

Loss from discontinued operations
—

 
2

Changes in operating assets and liabilities
(13,055
)
 
1,465

Adjustments to reconcile net income and operating cash flows to net income (loss) of consolidated VIE-RSO
42,360

 
(38,415
)
Net cash provided by operating activities
96,784

 
18,736

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(291
)
 
(1,035
)
Payments received on real estate loans and real estate
25

 
2,049

Investments in real estate and unconsolidated real estate entities
(1,561
)
 
(2,058
)
Principal payments on leases and loans
22

 
8

Purchase of loans and securities by consolidated VIE-RSO
(812,912
)
 
(675,650
)
Principal payments and proceeds from sales of loans and securities by consolidated VIE-RSO
552,913

 
842,252

Purchase of loans and investments
(7,320
)
 
(2,024
)
Proceeds from sale of loans and investments
721

 
—

Increase in restricted cash of consolidated VIE-RSO
18,328

 
30,079

Other investing activity of consolidated VIE-RSO
(11,024
)
 
13,346

Net cash (used in) provided by investing activities
(261,099
)
 
206,967

 
 
 
 

The accompanying notes are an integral part of these statements
7


RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(in thousands)
(unaudited)
 
Nine Months Ended
 
September 30,
 
2014
 
2013
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Increase in borrowings
2,520

 
2,000

Principal payments on borrowings
(2,813
)
 
(2,354
)
Net borrowings (repayments) of debt by consolidated VIE-RSO
67,954

 
(320,834
)
Dividends paid
(2,952
)
 
(1,194
)
Dividends paid on common stock by consolidated VIE-RSO
(75,920
)
 
(66,341
)
Proceeds from issuance of common stock
17,570

 
1,253

Net proceeds from issuance of common stock by consolidated VIE-RSO
177,568

 
184,279

Repurchases of common stock
(8,358
)
 
(1,601
)
Increase in restricted cash
(133
)
 
—

Other
—

 
81

Other financing activity of consolidated VIE-RSO
(4,546
)
 
(13,081
)
Net cash provided by (used in) financing activities
170,890

 
(217,792
)
CASH FLOWS FROM DISCONTINUED OPERATIONS:
 

 
 

Operating activities
—

 
(371
)
Net cash used in discontinued operations
—

 
(371
)
 
 
 
 
Increase in cash
6,575

 
7,540

Cash, beginning of year
19,853

 
11,899

Cash, end of period
$
26,428

 
$
19,439







The accompanying notes are an integral part of these statements
8

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 the Company's 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 and nine months ended September 30, 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 continually assesses its involvement with VIEs and re-evaluates 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 real estate and financial fund management segments make assumptions in determining the fair value of investments in investment securities. Actual results could differ from these estimates.
Change in Tax Law
The New York State 2014-2015 Budget Act (“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.



RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

Financing Receivables - Receivables from Managed Entities
The Company performs a review of the collectability of its receivables from managed entities on a quarterly basis.  If upon review there is an indication of impairment, the Company will analyze the future cash flows of the managed entity.  With respect to the receivables from its commercial finance investment partnerships, this takes into consideration several assumptions by management, primarily concerning estimates of future bad debts and recoveries.  For receivables from the real estate investment entities, 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. (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 ("RREGPS"), a Company-sponsored and managed Australian investment fund which is structured as a unit trust, 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. Securities that are held principally for resale in the near term are recorded as trading securities at fair value with changes in fair value recorded in earnings.
Reclassifications
Certain reclassifications have been made to the 2013 consolidated financial statements to conform to the 2014 presentation.
Recent Accounting Standards
Newly-Adopted Accounting Principles
The Company’s adoption of the following standard during the nine months ended September 30, 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 guidance requires that the unrecognized tax benefit be presented in the financial statements as a liability and not combined with the deferred tax asset. The guidance was effective for the Company beginning January 1, 2014.
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)
SEPTEMBER 30, 2014
(unaudited)

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”, which will replace most existing revenue recognition guidance GAAP.  The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services.  The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The ASU will be effective for the Company beginning January 1, 2017, including interim periods in 2017, and allows for both retrospective and prospective methods of adoption. The Company is in the process of determining the method of adoption and assessing the impact of this ASU on the Company’s consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12, "Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period". ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. This guidance is effective for the Company as of January 1, 2016, with early adoption permitted. The Company does not anticipate that the adoption of this standard will have a material impact on its consolidated financial statements.


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

NOTE 3 - CONSOLIDATING FINANCIAL INFORMATION
The following table presents the consolidating balance sheet as of September 30, 2014 (in thousands):
 
RAI
 
RSO
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
Cash
$
26,428

 
$
—

 
$
—

 
$
26,428

Restricted cash
704

 
—

 
—

 
704

Receivables
1,175

 
—

 
(124
)
 
1,051

Receivables from managed entities and related parties, net
35,178

 
—

 
(2,541
)
 
32,637

Investments in real estate, net
17,091

 
—

 
—

 
17,091

Investment securities, at fair value
23,782

 
—

 
(13,937
)
 
9,845

Investments in unconsolidated loan manager
39,048

 
—

 
—

 
39,048

Investments in unconsolidated entities
19,385

 
—

 
(6,113
)
 
13,272

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

 
246,873

 
—

 
246,873

Investments, at fair value
—

 
290,205

 
—

 
290,205

Loans
—

 
1,840,453

 
(558
)
 
1,839,895

Investments in real estate and unconsolidated entities
—

 
90,121

 
—

 
90,121

Other assets-RSO
—

 
124,729

 
(2,810
)
 
121,919

Total assets of consolidated VIE-RSO
—

 
2,592,381

 
(3,368
)
 
2,589,013

Property and equipment, net
5,177

 
—

 
—

 
5,177

Deferred tax assets, net
32,486

 
—

 
(9,678
)
 
22,808

Other assets
6,028

 
—

 
—

 
6,028

Total assets
$
206,482

 
$
2,592,381

 
$
(35,761
)
 
$
2,763,102

 
 
 
 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Accrued expenses and other liabilities
$
21,827

 
$
—

 
$
(2,800
)
 
$
19,027

Payables to managed entities and related parties
3,705

 
—

 
(10
)
 
3,695

Borrowings
21,009

 
—

 
(558
)
 
20,451

Liabilities of consolidated VIE-RSO:
 
 
 
 
 
 
 
     Borrowings
—

 
1,590,958

 
283

 
1,591,241

     Other liabilities
—

 
57,507

 
(2,665
)
 
54,842

Total liabilities of consolidated VIE-RSO
—

 
1,648,465

 
(2,382
)
 
1,646,083

Total liabilities
46,541

 
1,648,465

 
(5,750
)
 
1,689,256

Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity:
 
 
 
 
 
 
 
Preferred stock
—

 
—

 
—

 
—

Common stock
334

 
—

 
—

 
334

Additional paid-in capital
307,412

 
—

 
—

 
307,412

Accumulated deficit
(18,232
)
 
—

 
(5,808
)
 
(24,040
)
Treasury stock, at cost
(117,881
)
 
—

 
—

 
(117,881
)
Accumulated other comprehensive loss
(11,946
)
 
—

 
10,880

 
(1,066
)
Total stockholders’ equity
159,687

 
—

 
5,072

 
164,759

Noncontrolling interests
254

 
—

 
—

 
254

Noncontrolling interests attributable to consolidated VIE-RSO
—

 
943,916

 
(35,083
)
 
908,833

Total equity
159,941

 
943,916

 
(30,011
)
 
1,073,846

 
$
206,482

 
$
2,592,381

 
$
(35,761
)
 
$
2,763,102


    

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)


The following table presents the consolidating statement of operations for the three months ended September 30, 2014 (in thousands):
 
RAI
 
RSO
 
Eliminations
 
Consolidated
REVENUES:
 
 
 
 
 
 
 
Real estate
$
14,289

 
$
—

 
$
—

 
$
14,289

Financial fund management
5,557

 
—

 
—

 
5,557

Commercial finance
(17
)
 
—

 
—

 
(17
)
 
19,829

 
—

 
—

 
19,829

Revenues from consolidated VIE-RSO
—

 
34,716

 
—

 
34,716

Elimination of consolidated VIE-RSO revenues attributed to operating segments
—

 
—

 
(4,136
)
 
(4,136
)
Total revenues
19,829

 
34,716

 
(4,136
)
 
50,409

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Real estate
9,384

 
—

 
—

 
9,384

Financial fund management
2,812

 
—

 
—

 
2,812

Commercial finance
125

 
—

 
—

 
125

General and administrative
2,426

 
—

 
—

 
2,426

Provision for credit losses
559

 
—

 
—

 
559

Depreciation and amortization
453

 
—

 
—

 
453

 
15,759

 
—

 
—

 
15,759

Expenses of consolidated VIE-RSO
—

 
18,449

 
237

 
18,686

Elimination of consolidated VIE-RSO expenses attributed to operating segments
—

 
—

 
(3,502
)
 
(3,502
)
Total expenses
15,759

 
18,449

 
(3,265
)
 
30,943

OPERATING INCOME
4,070

 
16,267

 
(871
)
 
19,466

 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Gain on sales of investment securities, net
69

 
—

 
—

 
69

Interest expense
(467
)
 
—

 
—

 
(467
)
Other income, net
652

 
—

 
(572
)
 
80

Other income, net, from consolidated VIE-RSO
—

 
(1,936
)
 
—

 
(1,936
)
Elimination of consolidated VIE-RSO other expense, net
—

 
—

 
11

 
11

 
254

 
(1,936
)
 
(561
)
 
(2,243
)
Income from continuing operations before taxes
4,324

 
14,331

 
(1,432
)
 
17,223

Income tax provision
1,741

 
—

 
(237
)
 
1,504

Net income
2,583

 
14,331

 
(1,195
)
 
15,719

Net loss attributable to noncontrolling interests
11

 
—

 
—

 
11

Net income attributable to noncontrolling interests-RSO
—

 
(7,003
)
 
(7,211
)
 
(14,214
)
Net income attributable to common shareholders
$
2,594

 
$
7,328

 
$
(8,406
)
 
$
1,516

    
    

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

.    The following table presents the consolidating statement of operations for the three months ended September 30, 2013 (in thousands):
 
RAI
 
RSO
 
Eliminations
 
Consolidated
REVENUES:
 
 
 
 
 
 
 
Real estate
$
15,950

 
$
—

 
$
—

 
$
15,950

Financial fund management
8,502

 
—

 
—

 
8,502

Commercial finance
(30
)
 
—

 
—

 
(30
)
 
24,422

 
—

 
—

 
24,422

Revenues from consolidated VIE-RSO
—

 
23,786

 
—

 
23,786

Elimination of consolidated VIE-RSO revenues attributed to operating segments
—

 
—

 
(5,183
)
 
(5,183
)
Total revenues
24,422

 
23,786

 
(5,183
)
 
43,025

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Real estate
11,178

 
—

 
—

 
11,178

Financial fund management
3,547

 
—

 
—

 
3,547

Commercial finance
75

 
—

 
—

 
75

General and administrative
2,505

 
—

 
—

 
2,505

Provision for credit losses
1,808

 
—

 
—

 
1,808

Depreciation and amortization
413

 
—

 
—

 
413

 
19,526

 
—

 
—

 
19,526

Expenses of consolidated VIE-RSO
—

 
16,276

 
(722
)
 
15,554

Elimination of consolidated VIE-RSO expenses attributed to operating segments
—

 
—

 
(4,861
)
 
(4,861
)
Total expenses
19,526

 
16,276

 
(5,583
)
 
30,219

OPERATING INCOME
4,896

 
7,510

 
400

 
12,806

 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Interest expense
(530
)
 
—

 
—

 
(530
)
Other income, net
684

 
—

 
(556
)
 
128

Other income, net, from consolidated VIE-RSO
—

 
16,607

 
—

 
16,607

Elimination of consolidated VIE-RSO other expense, net
—

 
—

 
162

 
162

 
154

 
16,607

 
(394
)
 
16,367

Income from continuing operations before taxes
5,050

 
24,117

 
6

 
29,173

Income tax provision
1,261

 
—

 
722

 
1,983

Net income
3,789

 
24,117

 
(716
)
 
27,190

Net income attributable to noncontrolling interests
(40
)
 
—

 
—

 
(40
)
Net income attributable to noncontrolling interests-RSO
—

 
(1,996
)
 
(21,712
)
 
(23,708
)
Net income attributable to common shareholders
$
3,749

 
$
22,121

 
$
(22,428
)
 
$
3,442

 
 
 
 
 
 
 
 

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

The following table presents the consolidating statement of operations for the nine months ended September 30, 2014 (in thousands):
 
RAI
 
RSO
 
Eliminations
 
Consolidated
REVENUES:
 
 
 
 
 
 
 
Real estate
$
41,012

 
$
—

 
$
—

 
$
41,012

Financial fund management
20,773

 
—

 
—

 
20,773

Commercial finance
(158
)
 
—

 
—

 
(158
)
 
61,627

 
—

 
—

 
61,627

Revenues from consolidated VIE-RSO
—

 
100,604

 
—

 
100,604

Elimination of consolidated VIE-RSO revenues attributed to operating segments
—

 
—

 
(10,056
)
 
(10,056
)
Total revenues
61,627

 
100,604

 
(10,056
)
 
152,175

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Real estate
27,364

 
—

 
—

 
27,364

Financial fund management
9,980

 
—

 
—

 
9,980

Commercial finance
351

 
—

 
—

 
351

General and administrative
8,309

 
—

 
—

 
8,309

Provision for credit losses
3,342

 
—

 
—

 
3,342

Depreciation and amortization
1,369

 
—

 
—

 
1,369

 
50,715

 
—

 
—

 
50,715

Expenses of consolidated VIE-RSO
—

 
50,353

 
667

 
51,020

Elimination of consolidated VIE-RSO expenses attributed to operating segments
—

 
—

 
(9,374
)
 
(9,374
)
Total expenses
50,715

 
50,353

 
(8,707
)
 
92,361

OPERATING INCOME
10,912

 
50,251

 
(1,349
)
 
59,814

 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Gain on sale of investment securities, net
439

 
—

 
—

 
439

Interest expense
(1,447
)
 
—

 
—

 
(1,447
)
Other income, net
1,979

 
—

 
(1,716
)
 
263

Other income, net, from consolidated VIE-RSO
—

 
(758
)
 
—

 
(758
)
Elimination of consolidated VIE-RSO other income, net
—

 
—

 
29

 
29

 
971

 
(758
)
 
(1,687
)
 
(1,474
)
Income from continuing operations before taxes
11,883

 
49,493

 
(3,036
)
 
58,340

Income tax provision
4,991

 
—

 
(667
)
 
4,324

Net income
6,892

 
49,493

 
(2,369
)
 
54,016

Net income attributable to noncontrolling interests
(33
)
 
—

 
—

 
(33
)
Net income attributable to noncontrolling interests-RSO
—

 
(12,372
)
 
(36,387
)
 
(48,759
)
Net income attributable to common shareholders
$
6,859

 
$
37,121

 
$
(38,756
)
 
$
5,224



RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

The following table presents the consolidating statement of cash flows for the nine months ended September 30, 2014 (in thousands):
 
RAI
 
RSO
 
Eliminations
 
Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
Net income
$
6,892

 
$
49,493

 
$
(2,369
)
 
$
54,016

Adjustments to reconcile net income to net cash
provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
1,469

 
—

 
—

 
1,469

Provision for credit losses
3,342

 
—

 
—

 
3,342

Unrealized losses on trading securities
133

 
—

 
(22
)
 
111

Equity in earnings of unconsolidated entities
(2,789
)
 
—

 
491

 
(2,298
)
Distributions from unconsolidated entities
5,134

 
—

 
—

 
5,134

Gain on sale of investment securities, net
(1,940
)
 
—

 
95

 
(1,845
)
Gain on sale of leases and loans
(22
)
 
—

 
—

 
(22
)
Loss on sale of assets
439

 
—

 
—

 
439

Deferred income tax provision
4,838

 
—

 
—

 
4,838

Equity-based compensation issued
1,322

 
—

 
—

 
1,322

Trading securities purchases and sales, net
973

 
—

 
—

 
973

Changes in operating assets and liabilities
(10,255
)
 
—

 
(2,800
)
 
(13,055
)
Adjustments to reconcile net income and operating cash flows to net income of consolidated VIE-RSO
—

 
39,646

 
2,714

 
42,360

Net cash provided by operating activities
9,536

 
89,139

 
(1,891
)
 
96,784

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
Capital expenditures
(291
)
 
—

 
—

 
(291
)
Payments received on real estate loans and real estate
25

 
—

 
—

 
25

Principal payments on leases and loans
22

 
—

 
—

 
22

Investments in real estate and unconsolidated real estate entities
(1,561
)
 
—

 
—

 
(1,561
)
Purchase of loans and securities by consolidated VIE-RSO
—

 
(812,912
)
 
—

 
(812,912
)
Principal payments and proceeds from sales of loans and securities by consolidated VIE-RSO
—

 
552,913

 
—

 
552,913

Purchase of loans and investments
(7,320
)
 
—

 
—

 
(7,320
)
Proceeds from sale of loans and investments
721

 
—

 
—

 
721

Decrease in restricted cash of consolidated VIE-RSO
—

 
18,328

 
—

 
18,328

Other investing activity of consolidated VIE-RSO
—

 
(10,633
)
 
(391
)
 
(11,024
)
Net cash used in investing activities
(8,404
)
 
(252,304
)
 
(391
)
 
(261,099
)

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

 
RAI
 
RSO
 
Eliminations
 
Consolidated
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 

 
 
Increase in borrowings
2,520

 
—

 
—

 
2,520

Principal payments on borrowings
(3,204
)
 
—

 
391

 
(2,813
)
Net borrowings by consolidated VIE-RSO
—

 
67,954

 
—

 
67,954

Dividends paid
(2,952
)
 
—

 
—

 
(2,952
)
Dividends paid on common stock by consolidated VIE-RSO
—

 
(77,636
)
 
1,716

 
(75,920
)
Proceeds from issuance of common stock
17,570

 
—

 
—

 
17,570

Net proceeds from issuance of common stock by consolidated VIE-RSO
—

 
177,568

 
—

 
177,568

Repurchases of common stock
(8,358
)
 
—

 
—

 
(8,358
)
Increase in restricted cash
(133
)
 
—

 
—

 
(133
)
Other financing activity of consolidated VIE - RSO
—

 
(4,721
)
 
175

 
(4,546
)
Net cash provided by financing activities
5,443

 
163,165

 
2,282

 
170,890

 
 
 
 
 
 
 
 
Decrease in cash
6,575

 
—

 
—

 
6,575

Cash, beginning of year
19,853

 
—

 
—

 
19,853

Cash, end of period
$
26,428

 
$
—

 
$
—

 
$
26,428



RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows (in thousands, per share data):
 
Nine Months Ended
 
September 30,
 
2014
 
2013
Cash (paid) received:
 
 
 
Interest
$
(1,249
)
 
$
(1,270
)
Income tax payments
(952
)
 
(933
)
Refund of income taxes
167

 
100

 
 
 
 
Dividends declared per common share
$
0.16

 
$
0.10

 
 
 
 
Non-cash activities:
 

 
 

Repurchase common stock from employees in exchange for the payment of income taxes
$
263

 
$
68

Repurchase common stock in exchange for the exercise of warrants
1,754

 
—

Issuance of treasury stock for the Company's investment savings 401(k) plan
368

 
273

Leasehold improvements paid by the landlord
—

 
1,496

NOTE 5 - FINANCING RECEIVABLES
The following table is the aging of the Company’s financing receivables (presented gross of allowance for credit losses) as of September 30, 2014 (in thousands):
 
30-89 Days
Past Due
 
90-180 Days
Past Due
 
Greater than
181 Days
 
Total
Past Due
 
Current
 
Total
Loans and receivables from managed
   entities and related parties: (1)
 
 
 
 
 
 
 
 
 
 
 
Commercial finance
    investment entities
$
—

 
$
—

 
$
34,907

 
$
34,907

 
$
16

 
$
34,923

Real estate investment entities
707

 
1,199

 
18,730

 
20,636

 
6,710

 
27,346

Financial fund management entities
—

 
1

 
40

 
41

 
456

 
497

Other
—

 
—

 
—

 
—

 
2,391

 
2,391

 
707

 
1,200

 
53,677

 
55,584

 
9,573

 
65,157

Rent receivables - real estate
7

 
—

 
1

 
8

 
73

 
81

Total financing receivables
$
714

 
$
1,200

 
$
53,678

 
$
55,592

 
$
9,646

 
$
65,238

 
(1)
Receivables are presented gross of an allowance for credit losses of $32.5 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.
 
    

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

The following table is the aging of the Company’s financing receivables (presented gross of allowance for credit losses) as of December 31, 2013 (in thousands):
 
30-89 Days
Past Due
 
90-180 Days
Past Due
 
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 September 30, 2014:
 
 
 
 
 
 
 
Balance, beginning of period
$
39,028

 
$
—

 
$
2

 
$
39,030

Provision for credit losses
520

 
30

 
9

 
559

Charge-offs
(7,092
)
 
(30
)
 
(6
)
 
(7,128
)
Recoveries
64

 
2

 
—

 
66

Balance, end of period
$
32,520

 
$
2

 
$
5

 
$
32,527

 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2014:
 

 
 

 
 

 
 

Balance, beginning of period
$
36,229

 
$
—

 
$
14

 
$
36,243

Provision for (reversal of) credit losses
3,321

 
25

 
(4
)
 
3,342

Charge-offs
(7,094
)
 
(30
)
 
(5
)
 
(7,129
)
Recoveries
64

 
7

 
—

 
71

Balance, end of period
$
32,520

 
$
2

 
$
5

 
$
32,527

 
 
 
 
 
 
 
 
Ending balance, individually evaluated for impairment
$
32,520

 
$
2

 
$
—

 
$
32,522

Ending balance, collectively evaluated for impairment
—

 
—

 
5

 
5

Balance, end of period
$
32,520

 
$
2

 
$
5

 
$
32,527


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

 
Loans and receivables
from Managed
Entities
 
Leases and
Loans
 
Rent
Receivables
 
Total
Three Months Ended September 30, 2013:
 
 
 
 
 
 
 
Balance, beginning of period
$
34,587

 
$
—

 
$
29

 
$
34,616

Provision for (reversal of) credit losses
1,810

 
(18
)
 
16

 
1,808

Charge-offs
(669
)
 
—

 
(13
)
 
(682
)
Recoveries
—

 
18

 
—

 
18

Balance, end of period
$
35,728

 
$
—

 
$
32

 
$
35,760

 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2013:
 

 
 

 
 

 
 

Balance, beginning of period
$
32,560

 
$
—

 
$
68

 
$
32,628

Provision for (reversal of) credit losses
3,817

 
(25
)
 
1

 
3,793

Charge-offs
(669
)
 
—

 
(37
)
 
(706
)
Recoveries
20

 
25

 
—

 
45

Balance, end of period
$
35,728

 
$
—

 
$
32

 
$
35,760

 
 
 
 
 
 
 
 
Ending balance, individually evaluated for impairment
$
35,728

 
$
—

 
$
—

 
$
35,728

Ending balance, collectively evaluated for impairment
—

 
—

 
32

 
32

Balance, end of period
$
35,728

 
$
—

 
$
32

 
$
35,760

The Company’s financing receivables (presented exclusive of any allowance for credit losses) as of September 30, 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
$
65,157

 
$
—

 
$
65,157

Ending balance, collectively evaluated for impairment
—

 
81

 
81

Balance, end of period
$
65,157

 
$
81

 
$
65,238

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


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

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 September 30, 2014
 
 
 
 
 
 
 
Financing receivables with a specific valuation allowance:
 

 
 

 
 

 
 

Loans and receivables from managed entities – commercial finance
$
985

 
$
33,495

 
$
32,511

 
$
38,443

Rent receivables – real estate
—

 
5

 
5

 
—

 
 
 
 
 
 
 
 
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 September 30, 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):
 
September 30,
2014
 
December 31,
2013
Properties owned, net of accumulated depreciation of $9,054 and $8,666:
 
 
 
  Hotel property (Savannah, Georgia)
$
10,226

 
$
10,504

  Office building (Philadelphia, Pennsylvania)
774

 
781

 
11,000

 
11,285

Partnerships and other investments
6,091

 
6,411

Total investments in real estate, net
$
17,091

 
$
17,696

For three and nine months ended September 30, 2014, the Company recorded rental income of $1.3 million and $3.8 million, respectively. The contractual future minimum rental income on non-cancelable operating leases included in properties owned for each of the five succeeding annual periods ending September 30, and thereafter, are as follows (in thousands):
2015
$
1,017

2016
711

2017
633

2018
615

2019
344

Thereafter
512

Total
$
3,832

NOTE 7 - INVESTMENT SECURITIES
Components of investment securities are as follows (in thousands):
 
September 30,
2014
 
December 31,
2013
Available-for-sale securities
$
8,829

 
$
7,522

Trading securities
1,016

 
317

Total investment securities, at fair value
$
9,845

 
$
7,839

    

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

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
September 30, 2014
 
 
 
 
 
 
 
CLO securities
$
6,514

 
$
1,395

 
$
(27
)
 
$
7,882

Equity securities
888

 
59

 
—

 
947

Total
$
7,402

 
$
1,454

 
$
(27
)
 
$
8,829

 
 
 
 
 
 
 
 
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 CLO issuers that CVC Credit Partners, LLC ("CVC Credit Partners") manages at September 30, 2014 and December 31, 2013, respectively (see Note 8).  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.
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 nine months ended September 30, 2014, the Company purchased 749,976 units of RREGPS for $677,400.
Trading securities. The Company had net gains on trading securities of $855,000 and $1.9 million during the three and nine months ended September 30, 2014, respectively, including unrealized losses of $231,000 and $111,000, respectively, which were included in Financial Fund Management Revenues on the consolidated statements of operations. The Company had net gains on trading securities of $2.8 million and $4.6 million during the three and nine months ended September 30, 2013, respectively, including unrealized gains of $289,000 and $774,000, respectively.
Unrealized losses on 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
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
CLO securities
$
700

 
$
(3
)
 
1

 
$
439

 
$
(24
)
 
1

Equity securities
—

 
—

 
—

 
—

 
—

 
—

Total
$
700

 
$
(3
)
 
1

 
$
439

 
$
(24
)
 
1

December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
CLO securities
$
2,312

 
$
(196
)
 
3

 
$
—

 
$
—

 
—

Equity securities
92

 
(8
)
 
1

 
—

 
—

 
—

Total
$
2,404

 
$
(204
)
 
4

 
$
—

 
$
—

 
—

Other-than-temporary impairment losses.  During the three and nine months ended September 30, 2014, there were no impairment losses. In the three and nine months ended September 30, 2013, the Company recorded charges of $0 and $214,000, respectively, for the other-than-temporary impairment of certain of its investments in bank loan CLOs.    


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

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
 
September 30,
 
December 31,
 
 
2014
 
2013
Real estate investment entities
1% – 12%
 
$
8,513

 
$
8,271

Financial fund management partnerships
0.4% − 50%
 
4,098

 
5,294

Trapeza entities
33% − 50%
 
661

 
777

Investments in unconsolidated entities
 
 
$
13,272

 
$
14,342

Included in real estate investment 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 $1.3 million investment in RRE Opportunity REIT II ("Opportunity REIT II"), which is in its offering stage. The Company accounts for its investments in Opportunity REIT I and II on the cost method.
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. The Company records its 33% equity share of the results of its joint venture, CVC Credit Partners, in Financial Fund Management Revenues on the consolidated statements of operations and comprehensive income.
Summarized operating data for CVC Credit Partners is presented below (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Management fee revenues
$
19,103

 
$
10,413

 
$
45,890

 
$
34,502

Costs and expenses
(17,326
)
 
(8,618
)
 
(42,172
)
 
(32,388
)
Net income
$
1,777

 
$
1,795

 
$
3,718

 
$
2,114

Portion of net income attributable to the Company
$
586

 
$
593

 
$
1,227

 
$
698

In conjunction with the CVC Credit Partners joint venture, the Company retained a preferred interest in Apidos Capital Management, LLC ("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 September 30, 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.


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

NOTE 9 - ACCRUED EXPENSES AND OTHER LIABILITIES
The following is a summary of the components of accrued expenses and other liabilities (in thousands):
 
September 30,
2014
 
December 31,
2013
Accounts payable and other accrued liabilities
$
6,117

 
$
7,439

Supplemental executive retirement plan ("SERP") liability (see Note 14)
4,459

 
4,998

Accrued wages and benefits
2,797

 
4,304

Deferred rent
2,546

 
2,675

Apidos contractual obligation, at fair value (see Note 16)
760

 
995

Dividends payable
1,318

 
977

Short term insurance notes
1,030

 
746

  Total accrued expenses and other liabilities
$
19,027

 
$
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 September 30, 2014
 
December 31,
2013
 
Maximum
Amount of
Facility
 
Borrowings
Outstanding
 
Borrowings
Outstanding
Credit facilities:
 

 
 

 
 

TD Bank – secured revolving credit facility (1) 
$
10,997

 
$
—

 
$
—

Republic Bank – secured revolving credit facility
3,000

 
—

 
—

 
 

 
—

 
—

Other debt:
 
 
 
 
 
Senior Notes
 

 
10,000

 
10,000

Mortgage debt - hotel property
 

 
10,140

 
10,287

Other debt
 

 
311

 
332

Total borrowings outstanding
 

 
$
20,451

 
$
20,619


(1)
The amount of the facility as shown has been reduced for outstanding letters of credit of $503,000 at September 30, 2014.
Corporate and Real Estate Debt
TD Bank, N.A. (“TD Bank”).  Through April 24, 2014, the terms of the Company's line of credit with TD Bank allowed for borrowings up to $7.5 million with interest at either (a) the prime rate 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. 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 borrowing 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. 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.
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 held by the Company.      
There were no borrowings outstanding as of September 30, 2014 and the availability on the TD facility was $11.0 million, as reduced for letters of credit. For the three and nine months ended September 30, 2014 and three months ended September 30, 2013, there were no borrowings outstanding on the line of credit. For the nine months ended September 30, 2013, weighted average borrowings were $198,000 at a weighted average borrowing rate of 2.4%.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

Republic First Bank (“Republic Bank”). In February 2011, the Company entered into a $3.5 million revolving credit facility with Republic Bank.  The facility bears interest at the prime rate of interest plus 1% with a floor of 4.5%.  The loan is secured by a pledge of 700,000 shares of RSO stock held by the Company and a first priority security interest in an office building located in Philadelphia, Pennsylvania (see Note 6).  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 as of September 30, 2014 and the availability was $3.0 million. There were no borrowings under this facility during the three and nine months ended September 30, 2013.
Senior Notes
The Company's $10.0 million of 9% senior notes (the "Senior Notes") mature on March 31, 2015. The Senior Notes were issued with detachable 5-year warrants to purchase 3,690,195 shares of common stock, of which all have been exercised as of September 30, 2014. The effective interest rate for the three and nine months ended September 30, 2014 was 9.3% and 9.4%, respectively, and 9.7% and 9.8% for the three and nine months ended September 30, 2013, respectively. On August 28, 2014, the Senior Notes were modified to extend the maturity date to March 31, 2018 and to include an early redemption feature.  The Company may early redeem all or any part of the Senior Notes upon notification to the note holders at the redemption price plus any accrued and unpaid interest through to the date of such redemption. The redemption price will be at a premium to par, as follows: prior to March 31, 2016 at 102%, between March 31, 2016 and March 31, 2017 at 101%%, and thereafter at 100%.
Other debt
In June 2014, the Company entered into a three-year capital lease for the purchase of computer equipment with monthly repayments of $4,205. The principal balance of the lease at September 30, 2014 was $137,000.
Debt repayments
Annual principal payments on the Company’s aggregate borrowings for the next five years ending September 30, 2014, and thereafter, are as follows (in thousands):
2015
$
432

2016
270

2017
274

2018
10,252

2019
269

Thereafter
8,954

Total
$
20,451

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 September 30, 2014.
NOTE 11 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

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
85

 
3

 
(4
)
 
81

 
165

Balance, September 30, 2014 net of tax of $541, $0, $(1) and $(1,725)
$
886

 
$
(1
)
 
$
(6
)
 
$
(1,945
)
 
$
(1,066
)
Amounts reclassified from accumulated other comprehensive income were reflected in the consolidated financial statements, as follows:
Category
 
Locations in the consolidated financial statements
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 adjustments
 
Investment securities
NOTE 12 - NONCONTROLLING INTERESTS
The following table presents the activity in noncontrolling interests (in thousands):
 
For the Nine Months Ended 
 September 30, 2014
 
RSO
 
RAI
Noncontrolling interests, beginning of year
$
743,364

 
$
238

Net income attributable to noncontrolling interests
48,759

 
33

Other comprehensive income
18,033

 
—

Proceeds from issuance of equity interests, net
177,641

 
—

Amortization of stock-based compensation
4,497

 
—

Distributions to noncontrolling interests
(88,390
)
 
(17
)
Other
4,929

 
—

Noncontrolling interests, end of period
$
908,833

 
$
254




RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

NOTE 13 - EARNINGS PER SHARE
Basic earnings per share (“Basic EPS”) is computed using the weighted average number of common shares outstanding during the period, inclusive of nonvested share-based awards that are entitled to receive non-forfeitable dividends.  The diluted earnings 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.
The following table presents a reconciliation of the shares used in the computation of Basic EPS and Diluted EPS (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Shares
 
 
 
 
 
 
 
Basic shares outstanding
21,109

 
20,342

 
20,586

 
20,255

Dilutive effect of outstanding stock options, warrants and director units
1,192

 
1,530

 
1,538

 
1,676

Diluted shares outstanding
22,301

 
21,872

 
22,124

 
21,931

    
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.  
The components of net periodic benefit costs for the SERP were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Interest cost
$
68

 
$
57

 
$
205

 
$
169

Less: expected return on plan assets
(38
)
 
(25
)
 
(116
)
 
(75
)
Plus: Amortization of unrecognized loss
70

 
95

 
209

 
285

Net cost
$
100

 
$
127

 
$
298

 
$
379

Restricted stock.  During the nine months ended September 30, 2014, the Company awarded a total of 628,841 shares of restricted stock valued at $5.7 million based on the closing price of the stock on the respective grant date. Additionally, the Company issued 12,000 shares that were earned as part of a performance-based award, which were valued at $116,000 based on the closing price of the stock as of the beginning of the measurement period.


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

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):
 
September 30,
2014
 
December 31,
2013
Loans and receivables from managed entities and related parties, net:
 
 
 
Real estate investment entities
$
27,346

 
$
21,487

Commercial finance investment entities (1)
2,403

 
8,174

Financial fund management investment entities
497

 
1,138

Other
429

 
124

Loan to CVC Credit Partners
1,962

 
—

Receivables from managed entities and related parties
$
32,637

 
$
30,923

 
 
 
 
Payables due to managed entities and related parties, net:
 

 
 

Real estate investment entities (2) 
$
3,580

 
$
2,940

Other
115

 
170

Payables to managed entities and related parties
$
3,695

 
$
3,110

 
(1)
Net of reserves for credit losses of $32.5 million and $36.2 million as of September 30, 2014 and December 31, 2013, respectively, related to management fees due from certain of the Company's commercial finance investment entities that, based on estimated cash distributions, are not expected to be collectible.
(2)
Reflects $3.4 million and $2.9 million in funds provided by the real estate investment entities as of September 30, 2014 and December 31, 2013, respectively, which are held by the Company to self-insure the properties held by those entities.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

The Company receives fees, dividends and reimbursed expenses from several related/managed entities.  In addition, the Company reimburses related entities for certain operating expenses.  The following table details those activities (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Fees from unconsolidated investment entities:
 
 
 
 
 
 
 
Real estate (1) 
$
8,992

 
$
6,726

 
$
26,436

 
$
16,273

Financial fund management
794

 
801

 
2,861

 
2,335

Commercial finance (2)
—

 
—

 
—

 
—

CVC Credit Partners – reimbursement of net costs and expenses
211

 
295

 
836

 
979

RRE Opportunity REIT I:
 
 
 
 
 
 
 
Reimbursement of costs and expenses
641

 
204

 
1,556

 
605

Dividends paid
30

 
28

 
88

 
85

RRE Opportunity REIT II:
 
 
 
 
 
 
 
Reimbursement of costs and expenses
642

 
—

 
1,590

 
—

LEAF:
 
 
 
 
 
 
 
Payment for sub-servicing the commercial finance
   investment partnerships
(52
)
 
(197
)
 
(253
)
 
(743
)
Payment for rent and related expenses
—

 
(144
)
 
—

 
(543
)
Reimbursement of net costs and expenses
31

 
53

 
95

 
168

1845 Walnut Associates Ltd:
 
 
 
 
 
 
 
Payment for rent and related expenses
(154
)
 
(286
)
 
(561
)
 
(476
)
Property management fees
56

 
32

 
149

 
149

Brandywine Construction & Management, Inc. –
  payment for property management of hotel property
(57
)
 
(54
)
 
(169
)
 
(167
)
Atlas Energy, L.P. – reimbursement of net costs and expenses
52

 
49

 
124

 
243

Ledgewood P.C. – payment for legal services 
(98
)
 
(76
)
 
(165
)
 
(180
)
Graphic Images, LLC – payment for printing services
(27
)
 
(20
)
 
(116
)
 
(59
)
The Bancorp, Inc. – reimbursement of net costs and expenses
29

 
29

 
84

 
85

9 Henmar LLC – payment of broker/consulting fees 
(3
)
 
(4
)
 
(21
)
 
(24
)
 
(1)
Reflects discounts recorded by the Company of $38,000 and $112,000 for the three and nine months ended September 30, 2014, respectively, and $56,000 and $169,000 for the three and nine months ended September 30, 2013, respectively, in connection with management fees from its real estate investment entities that it expects to receive in future periods.
(2)
During the three and nine months ended September 30, 2014, the Company waived $105,000 and $605,000, respectively, and $410,000 and $1.5 million, respectively, during the three and nine months ended September 30, 2013, of its fund management fees from its commercial finance investment entities.

On February 6, 2014, Opportunity REIT II commenced its initial public offering of up to $1.0 billion in common stock at a maximum price of $10 per share. Opportunity REIT II will focus on acquiring under-performing multifamily rental properties, distressed real estate and performing loans. Resource Real Estate, a subsidiary of the Company, is the external manager. As of September 30, 2014, the Company had a $3.1 million receivable due from Opportunity REIT II for offering costs and operating expense reimbursements.

On June 14, 2014, the Company provided a $1.3 million short-term bridge loan to Opportunity REIT II with interest accruing at a rate of LIBOR plus 300 basis points. The loan and related interest were repaid in full by June 30, 2014.
On May 6, 2014, the Company made a €1.5 million bridge loan to CVC Credit Partners with interest accruing at a rate of the Euro Interbank Offered Rate ("EURIBOR") plus 7%. In September 2014, the Company and CVC agreed to extend the maturity of the note until April 2015.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 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 September 30, 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 $19,000 and $56,000 of interest income on this loan during the three and nine months ended September 30, 2014, respectively, and $17,000 and $53,000 during the three and nine months ended September 30, 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.
In March 2014, 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. Effective July 31, 2014, the partnership was liquidated and the Company assumed the portfolio in settlement of the outstanding loan receivable
In July 2014, the Company and certain of its employees, together with RSO, purchased a portfolio of securities for $23.5 million. The portfolio, held by a subsidiary of RSO, is managed by the Company.
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.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

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 6.8% - 10.3%). Cash is first applied to the payoff of the underlying principal and interest on debt used to purchase the portfolios. The projected cash flows also take into consideration the receipt of other income (such as late fees or residual gains), the payment of general and administrative expenses of the funds and distributions to limited partners. The remaining excess cash is then available to repay the amounts due to the Company.
Investment securities − equity securities. The Company uses quoted market prices 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 RREGPS. The underlying investments in RREGPS are all publicly-traded securities as of September 30, 2014 (Level 2).
Investment securities − trading securities. The Company holds seven securities within its trading portfolio, six of which are debt or equity investments in externally managed collateralized debt obligation ("CDO") issuers and one of which is a term loan (Level 3).  
•
Two of the CDOs are illiquid European CDO equity investments, valued based on recent market trading data for similar securities.
•
One of the CDOs is an illiquid European commercial real estate ("CRE") CDO senior debt investment, valued based on recent market trading data of the same security and qualitative analysis of the CDO's net asset value.
•
One of the CDOs is substantially liquidated, holding only one loan. The loan is expected to be paid off in 2014, but is discounted by 20% to account for any uncertainties.
•
One of the CDOs, which is currently deleveraging, is valued using assumptions of 3% constant default rate, 30% constant prepayment rate, and 30% loss severity rate (with some asset-specific assumptions).
•
One of the CDOs is an equity position, valued using assumptions of 8% to 10% constant default rate, 20% constant prepayment rate, and 30% loss severity rate.
•
One loan position was valued based on recent observable trades of the same security.
Investment securities − CLO securities. The fair value of collateralized loan obligation ("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 rates 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 contractual commitment associated with its investment in the Apidos-CVC preferred stock was initially valued at $589,000 based on the present value of the underlying discounted projected cash flows of the legacy Apidos incentive management fees (Level 3).
As of September 30, 2014, 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
$
261

 
$
686

 
$
8,898

 
$
9,845

    

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

As of December 31, 2013, 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

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 nine months ended September 30, 2014 (in thousands):
 
Investment Securities
Balance, beginning of year
$
7,407

Purchases
14,491

Income accreted
721

Payments and distributions received, net
(2,870
)
Sales
(13,096
)
Gains on sale of investment securities
370

Gains on sales of trading securities
1,853

Unrealized holding losses on trading securities
(226
)
Change in unrealized gains included in accumulated other comprehensive loss
248

Balance, end of period
$
8,898

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

Payments and distributions received, net
(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


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

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 September 30, 2014
 
Valuation Technique
 
Unobservable Inputs
 
Assumptions
(weighted average)
CLO securities
$
7,882

 
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
 
99.5% - 100%
 
 
 
 
 
Discount rates
 
12%
 
 
 
 
 
Reinvestment spread
 
200%
 
 
 
 
 
 
 
 
Trading securities
$
1,016

 
Net asset value
 
Discount rates
 
0% - 20%
 
 
 
Discounted cash flow
 
Constant default rate
 
2% - 10%
 
 
 
 
 
Constant prepayment rate
 
20% - 30%
 
 
 
 
 
Loss severity rate
 
30%
The Company's carrying value of the assets and liabilities measured at fair value on a non-recurring basis were as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
As of September 30, 2014
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Loans and receivables from managed entities – commercial finance and real estate
$
—

 
$
—

 
$
2,403

 
$
2,403

Other assets - commercial finance portfolio
—

 
—

 
351

 
351

 
$
—

 
$
—

 
$
2,754

 
$
2,754

Liability:
 

 
 

 
 

 
 

Apidos contractual commitment
$
—

 
$
—

 
$
760

 
$
760

 
 
 
 
 
 
 
 
As of 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


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

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):
 
September 30, 2014
 
December 31, 2013
 
Carrying
Amount
 
Estimated Fair Value
 
Carrying
Amount
 
Estimated Fair Value
Assets:
 
 
 
 
 
 
 
Loans and receivables from managed entities
$
32,637

 
$
32,637

 
$
30,923

 
$
30,923

 
 
 
 
 
 
 
 
Borrowings:
 

 
 

 
 

 
 

Real estate debt
$
10,140

 
$
11,204

 
$
10,287

 
$
10,702

Senior Notes
10,000

 
13,073

 
10,000

 
12,619

Other debt
311

 
311

 
332

 
332

 
$
20,451

 
$
24,588

 
$
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 September 30, 2014 and December 31, 2013.

NOTE 17 - COMMITMENTS AND CONTINGENCIES
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 $100,000 and $221,000 as of September 30, 2014 and December 31, 2013, respectively.  As of September 30, 2014 and December 31, 2013, Resource Securities net capital was $551,000 and $2.7 million, respectively, which exceeded the minimum requirements by $451,000 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.
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 September 30, 2014, except for the 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 were recorded in the consolidated financial statements.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

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):
Three Months Ended 
 September 30, 2014
 
Real
Estate
 
Financial
Fund
Management
 
Commercial
Finance
 
All
Other (1)
 
Total
RAI
 
RSO
 
Eliminations
 
Total
Consolidation
Revenues from external customers
 
$
14,377

 
$
4,320

 
$
21

 
$
—

 
$
18,718

 
$
34,716

 
$
(3,645
)
 
$
49,789

Equity in (losses) earnings of unconsolidated entities
 
(88
)
 
1,237

 
(38
)
 
—

 
1,111

 
—

 
(491
)
 
620

Total revenues
 
14,289

 
5,557

 
(17
)
 
—

 
19,829

 
34,716

 
(4,136
)
 
50,409

Segment operating expenses
 
(9,384
)
 
(2,812
)
 
(125
)
 
—

 
(12,321
)
 
(18,686
)
 
3,502

 
(27,505
)
General and administrative expenses
 
(804
)
 
(416
)
 
—

 
(1,206
)
 
(2,426
)
 
—

 
—

 
(2,426
)
Provision for credit losses
 
(8
)
 
—

 
(551
)
 
—

 
(559
)
 
—

 
—

 
(559
)
Depreciation and amortization
 
(309
)
 
(16
)
 
—

 
(128
)
 
(453
)
 
—

 
—

 
(453
)
Gain on sale of investment securities, net
 
—

 
69

 
—

 
—

 
69

 
—

 
—

 
69

Interest expense
 
(190
)
 
—

 
(2
)
 
(275
)
 
(467
)
 
—

 
—

 
(467
)
Other income (expense), net
 
280

 
533

 
19

 
(180
)
 
652

 
(1,936
)
 
(572
)
 
(1,856
)
Pretax income attributable to noncontrolling interests (2)
 
(9
)
 
—

 
—

 
—

 
(9
)
 
(14,214
)
 
—

 
(14,223
)
Pretax income (loss) from continuing operations excluding noncontrolling interests
 
$
3,865

 
$
2,915

 
$
(676
)
 
$
(1,789
)
 
$
4,315

 
$
(120
)
 
$
(1,206
)
 
$
2,989

Nine Months Ended 
 September 30, 2014
 
Real
Estate
 
Financial
Fund
Management
 
Commercial
Finance
 
All
Other (1)
 
Total
RAI
 
RSO
 
Eliminations
 
Total
Consolidation
Revenues from external customers
 
$
41,681

 
$
17,136

 
$
21

 
$
—

 
$
58,838

 
$
100,604

 
$
(9,565
)
 
$
149,877

Equity in (losses) earnings of unconsolidated entities
 
(669
)
 
3,637

 
(179
)
 
—

 
2,789

 
—

 
(491
)
 
2,298

Total revenues
 
41,012

 
20,773

 
(158
)
 
—

 
61,627

 
100,604

 
(10,056
)
 
152,175

Segment operating expenses
 
(27,364
)
 
(9,980
)
 
(351
)
 
—

 
(37,695
)
 
(51,020
)
 
9,374

 
(79,341
)
General and administrative expenses
 
(2,631
)
 
(1,314
)
 
—

 
(4,364
)
 
(8,309
)
 
—

 
—

 
(8,309
)
Reversal of (provision for) credit losses
 
2

 
—

 
(3,344
)
 
—

 
(3,342
)
 
—

 
—

 
(3,342
)
Depreciation and amortization
 
(927
)
 
(47
)
 
—

 
(395
)
 
(1,369
)
 
—

 
—

 
(1,369
)
Gain on sale of investment securities, net
 
—

 
439

 
—

 
—

 
439

 
—

 
—

 
439

Interest expense
 
(577
)
 
—

 
(11
)
 
(859
)
 
(1,447
)
 
—

 
—

 
(1,447
)
Other income (expense), net
 
647

 
1,659

 
17

 
(344
)
 
1,979

 
(758
)
 
(1,687
)
 
(466
)
Pretax income attributable to noncontrolling interests (2)
 
(53
)
 
—

 
—

 
—

 
(53
)
 
(48,759
)
 
—

 
(48,812
)
Pretax income (loss) from continuing operations excluding noncontrolling interests
 
$
10,109

 
$
11,530

 
$
(3,847
)
 
$
(5,962
)
 
$
11,830

 
$
67

 
$
(2,369
)
 
$
9,528



RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

Three Months Ended 
 September 30, 2013
 
Real
Estate
 
Financial
Fund
Management
 
Commercial
Finance
 
All Other (1)
 
Total
RAI
 
RSO
 
Eliminations
 
Total
Consolidation
Revenues from external customers
 
$
15,973

 
$
7,065

 
$
—

 
$
—

 
$
23,038

 
$
23,786

 
$
(5,183
)
 
$
41,641

Equity in (losses) earnings of unconsolidated entities
 
(23
)
 
1,437

 
(30
)
 
—

 
1,384

 
—

 
—

 
1,384

Total revenues
 
15,950

 
8,502

 
(30
)
 
—

 
24,422

 
23,786

 
(5,183
)
 
43,025

Segment operating expenses
 
(11,178
)
 
(3,547
)
 
(75
)
 
—

 
(14,800
)
 
(15,554
)
 
4,861

 
(25,493
)
General and administrative expenses
 
(674
)
 
(282
)
 
—

 
(1,549
)
 
(2,505
)
 
—

 
—

 
(2,505
)
Provision for credit losses
 
(29
)
 
—

 
(1,779
)
 
—

 
(1,808
)
 
—

 
—

 
(1,808
)
Depreciation and amortization
 
(258
)
 
(13
)
 
—

 
(142
)
 
(413
)
 
—

 
—

 
(413
)
Interest expense
 
(209
)
 
(7
)
 
1

 
(315
)
 
(530
)
 
—

 
—

 
(530
)
Other income, net
 
249

 
557

 
—

 
(122
)
 
684

 
16,607

 
(394
)
 
16,897

Pretax income attributable to noncontrolling interests (2)
 
(12
)
 
—

 
—

 
—

 
(12
)
 
(23,708
)
 
—

 
(23,720
)
Income (loss) from continuing operations including noncontrolling interests before taxes
 
$
3,839

 
$
5,210

 
$
(1,883
)
 
$
(2,128
)
 
$
5,038

 
$
1,131

 
$
(716
)
 
$
5,453


Nine Months Ended 
 September 30, 2013
 
Real
Estate
 
Financial
Fund
Management
 
Commercial
Finance
 
All
Other (1)
 
Total
RAI
 
RSO
 
Eliminations
 
Total
Consolidation
Revenues from external customers
 
$
39,777

 
$
12,129

 
$
—

 
$
—

 
$
51,906

 
$
76,011

 
$
(10,608
)
 
$
117,309

Equity in (losses) earnings of unconsolidated entities
 
(334
)
 
3,105

 
(243
)
 
—

 
2,528

 
—

 
—

 
2,528

Total revenues
 
39,443

 
15,234

 
(243
)
 
—

 
54,434

 
76,011

 
(10,608
)
 
119,837

Segment operating expenses
 
(29,514
)
 
(7,769
)
 
99

 
—

 
(37,184
)
 
(43,110
)
 
10,178

 
(70,116
)
General and administrative expenses
 
(2,893
)
 
(604
)
 
—

 
(3,310
)
 
(6,807
)
 
—

 
—

 
(6,807
)
Reversal of (provision for) credit losses
 
2,523

 
(199
)
 
(6,117
)
 
—

 
(3,793
)
 
—

 
—

 
(3,793
)
Depreciation and amortization
 
(805
)
 
(49
)
 
—

 
(464
)
 
(1,318
)
 
—

 
—

 
(1,318
)
Other-than-temporary impairment on investments
 
—

 
(214
)
 
—

 
—

 
(214
)
 
—

 
—

 
(214
)
Interest expense
 
(613
)
 
(7
)
 
—

 
(905
)
 
(1,525
)
 
—

 
—

 
(1,525
)
Other income, net
 
719

 
1,704

 
7

 
(361
)
 
2,069

 
16,607

 
(1,445
)
 
17,231

Pretax income attributable to noncontrolling interests (2)
 
(23
)
 
—

 
—

 
—

 
(23
)
 
(44,394
)
 
—

 
(44,417
)
Income (loss) from continuing operations including noncontrolling interests before taxes
 
$
8,837

 
$
8,096

 
$
(6,254
)
 
$
(5,040
)
 
$
5,639

 
$
5,114

 
$
(1,875
)
 
$
8,878

Segment assets
 
Real
Estate
 
Financial
Fund
Management
 
Commercial
Finance
 
All
Other (1)
 
Total
RAI
 
RSO
 
Total
Consolidation
September 30, 2014
 
$
187,668

 
$
58,689

 
$
4,301

 
$
(76,569
)
 
$
174,089

 
$
2,589,013

 
$
2,763,102

September 30, 2013
 
$
177,314

 
$
60,105

 
$
8,747

 
$
(74,123
)
 
$
172,043

 
$
2,271,468

 
$
2,443,511

 
(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 attributable to noncontrolling interests.  However, these interests are excluded from income (loss) from operations as computed in accordance with U.S. GAAP and should be deducted to compute income from operations as reflected in the Company’s consolidated statements of operations.    

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 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, nor do creditors of the Company have recourse against the assets of RSO.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

The following reflects the assets and liabilities and operations of RSO which were consolidated by the Company:
RSO Balance Sheets Detail (in thousands):
 
 
 
 
September 30, 2014
 
December 31, 2013
ASSETS (1)
 
 
 
Cash and cash equivalents
$
163,269

 
$
262,270

Restricted cash
83,604

 
63,309

Subtotal - Cash and cash equivalents
246,873

 
325,579

Investment securities, trading
9,187

 
11,558

Investment securities available-for-sale, pledged as collateral, at fair value
204,843

 
162,608

Investment securities available-for-sale, at fair value
76,175

 
52,598

Subtotal - Investments, at fair value
290,205

 
226,764

Loans, pledged as collateral and net of allowances of $4.5 million and $13.8 million (of which $83.0 million and $0 at fair value)
1,744,899

 
1,369,526

Loans receivable–related party net of allowance of $936,000 and $0
4,172

 
6,966

Loans held for sale
91,382

 
21,916

Subtotal - Loans, before eliminations
1,840,453

 
1,398,408

Eliminations
(558
)
 
(950
)
Subtotal - Loans
1,839,895

 
1,397,458

Property held-for-sale
29,581

 
25,346

Investment in real estate
—

 
29,778

Investments in unconsolidated entities
60,540

 
69,069

Subtotal, Investments in real estate and unconsolidated entities
90,121

 
124,193

Line items included in "other assets":
 
 
 
Linked transactions, net at fair value
14,272

 
30,066

Derivatives, at fair value
21,618

 
—

Interest receivable
14,831

 
8,965

Deferred tax asset
4,853

 
5,212

Principal paydown receivable
34,297

 
6,821

Intangible assets
10,254

 
11,822

Prepaid expenses
4,529

 
2,871

Other assets
20,075

 
10,726

Subtotal - Other assets, before eliminations
124,729

 
76,483

Eliminations
(2,810
)
 
(16
)
Subtotal - Other assets
121,919

 
76,467

Total assets (excluding eliminations)
$
2,592,381

 
$
2,151,427

Total assets (including eliminations)
$
2,589,013

 
$
2,150,461

LIABILITIES (2)
 

 
 

Borrowings (of which $94.9 million and $0 at fair value)
$
1,590,958

 
$
1,319,810

Eliminations
283

 
205

Subtotal Borrowings
1,591,241

 
1,320,015

Distribution payable
30,340

 
27,023

Accrued interest expense
3,875

 
1,693

Derivatives, at fair value
8,830

 
10,586

Accrued tax liability
3,131

 
1,629

Deferred tax liability
—

 
4,112

Accounts payable and other liabilities
11,331

 
12,650

Subtotal - Other liabilities, before eliminations
57,507

 
57,693

Eliminations
(2,665
)
 
(2,446
)
Subtotal - Other liabilities
54,842

 
55,247

Total liabilities (before eliminations)
$
1,648,465

 
$
1,377,503

Total liabilities (after eliminations)
$
1,646,083

 
$
1,375,262


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)


RSO Balance Sheets Detail (in thousands):
 
 
 
 
September 30,
2014
 
December 31,
2013
(1) Assets of consolidated RSO's VIEs included in total assets above:
 
 
 
        Restricted cash
$
80,633

 
$
61,372

        Investments securities available-for-sale, pledged as collateral, at fair value
110,376

 
105,846

        Loans held for sale
36,674

 
2,376

        Loans, pledged as collateral and net of allowances of $4.0 million
and $8.8 million ($83.0 million and $0 at fair value)
1,405,788

 
1,219,569

        Interest receivable
8,066

 
5,627

        Prepaid expenses
217

 
247

        Principal receivable
34,100

 
6,821

        Other assets
(12
)
 
—

        Total assets of consolidated RSO VIEs
$
1,675,842

 
$
1,401,858

 
 
 
 
(2) Liabilities of consolidated RSO's VIEs included in total liabilities above:
 
 
 
        Borrowings ($140.2 million and $0 at fair value)
$
1,214,923

 
$
1,070,339

        Accrued interest expense
1,280

 
918

        Derivatives, at fair value
7,958

 
10,191

        Accounts payable and other liabilities
(418
)
 
1,604

        Total liabilities of consolidated RSO VIEs
$
1,223,743

 
$
1,083,052




RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

RSO Income Statement Detail (in thousands):
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
REVENUES
 
 
 
 
 
 
 
Interest income:
 
 
 
 
 
 
 
Loans
$
27,026

 
$
24,374

 
$
73,474

 
$
78,370

Securities
5,168

 
3,411

 
12,563

 
10,949

Interest income − other
1,647

 
679

 
5,481

 
3,180

Total interest income
33,841

 
28,464

 
91,518

 
92,499

Interest expense
11,589

 
11,762

 
31,836

 
34,061

Net interest income
22,252

 
16,702

 
59,682

 
58,438

Rental income
1,118

 
4,649

 
7,777

 
15,875

Dividend income
16

 
223

 
169

 
256

Equity in net earnings (losses) of unconsolidated subsidiaries
887

 
(535
)
 
4,663

 
(888
)
Fee income
2,344

 
1,245

 
7,166

 
4,182

Net realized and unrealized gains on sales of investment securities available-for-sale and loans
7,546

 
570

 
15,487

 
3,355

Net realized and unrealized gains (losses) on investment securities, trading
376

 
(229
)
 
(1,834
)
 
(864
)
Unrealized gain (losses) and net interest income on linked transactions, net
177

 
1,161

 
7,494

 
(4,343
)
Revenues from consolidated VIE-RSO
34,716

 
23,786

 
100,604

 
76,011

OPERATING EXPENSES
 

 
 

 
 
 
 
Management fees − related party
3,606

 
5,113

 
10,000

 
11,006

Equity compensation − related party
798

 
2,120

 
4,497

 
7,866

Rental operating expense
695

 
3,523

 
5,168

 
11,084

General and administrative
11,586

 
2,898

 
30,936

 
8,761

Depreciation and amortization
562

 
904

 
2,158

 
3,041

Income tax (benefit) expense
(237
)
 
722

 
(667
)
 
4,221

Net impairment losses recognized in earnings
—

 
255

 
—

 
811

Provision (recovery) for loan losses
1,439

 
741

 
(1,739
)
 
541

Total operating expenses
18,449

 
16,276

 
50,353

 
47,331

Reclassification of income tax expense
237

 
(722
)
 
667

 
(4,221
)
Expenses of consolidated VIE-RSO
18,686

 
15,554

 
51,020

 
43,110

Adjusted operating income
16,030

 
8,232

 
49,584

 
32,901

OTHER REVENUE (EXPENSE)
 

 
 

 
 
 
 
(Loss) gain on sale of real estate
(69
)
 
16,607

 
2,973

 
16,607

Other expense
—

 
—

 
(1,262
)
 
—

Loss on the reissuance of debt
(1,867
)
 
—

 
(2,469
)
 
—

Other expense, net, from consolidated VIE-RSO
(1,936
)
 
16,607

 
(758
)
 
16,607

Income from continuing operations
14,094

 
24,839

 
48,826

 
49,508

Income tax provision-RSO
(237
)
 
722

 
(667
)
 
4,221

NET INCOME
14,331

 
24,117

 
49,493

 
45,287

Net income allocated to preferred shares
(5,545
)
 
(1,996
)
 
(11,303
)
 
(5,107
)
Net income allocated to noncontrolling interests
(1,458
)
 
—

 
(1,069
)
 
—

NET INCOME ALLOCABLE TO RSO COMMON SHAREHOLDERS
$
7,328

 
$
22,121

 
$
37,121

 
$
40,180



RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

RSO Cash Flow Detail (in thousands)
Nine Months Ended
 
September 30,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
49,493

 
$
45,287

Items included in "Change in cash attributable to consolidated VIE-RSO":
 
 
 
(Recovery) provision for loan losses
(1,739
)
 
541

Depreciation of investments in real estate and other
2,252

 
1,638

Amortization of intangible assets
1,541

 
1,463

Amortization of term facilities
—

 
876

Accretion of net discounts on loans held for investment
(2,045
)
 
(8,306
)
Accretion of net discounts on securities available-for-sale
(2,847
)
 
(1,925
)
Amortization of discounts on convertible notes
896

 
—

Amortization of discount on notes securitization
70

 
3,937

Amortization of debt issuance costs on notes of securitizations
2,596

 
2,868

Amortization of stock-based compensation
4,497

 
7,866

Amortization of terminated derivative instruments
212

 
322

Distribution accrued to preferred stockholders
—

 
(5,107
)
Accretion of interest-only available-for-sale securities
(573
)
 
(714
)
Non-cash incentive compensation to the Manager
—

 
484

Deferred income tax (benefit) provision
(689
)
 
502

Change in mortgage loans held for sale, net
(42,178
)
 
—

Purchase of securities, trading
(4,000
)
 
(11,044
)
Principal payments on securities, trading
50

 
4,211

Proceeds from sales of securities, trading
379

 
18,713

Net realized and unrealized gain on investment securities, trading
1,834

 
864

Net realized gains on sales of investment securities available-for-sale and loans
(15,488
)
 
(3,355
)
Loss on the reissuance of debt
2,469

 
—

Gain on sale of real estate
(2,973
)
 
(16,607
)
Net impairment losses recognized in earnings
—

 
802

      Linked transactions fair value adjustments
(5,713
)
 
5,224

      Equity in net (earnings) losses of unconsolidated subsidiaries
(4,663
)
 
888

Changes in operating assets and liabilities, net of acquisitions
6,757

 
17,404

Net cash (used in) provided by operating activities
(59,355
)
 
21,545

Change in consolidated VIE-RSO cash for the period
99,001

 
(59,185
)
Subtotal - Change in cash attributable to consolidated VIE-RSO before eliminations
39,646

 
(37,640
)
Elimination of intercompany activity
2,714

 
(291
)
Subtotal - Adjustments to reconcile net income and operating cash flows to net income (loss) of consolidated VIE-RSO
42,360

 
(37,931
)
Non-cash incentive compensation to Manager
—

 
484

Elimination of intercompany activity
—

 
(484
)
Non-cash incentive compensation to Manager, after eliminations
—

 
—

Net cash (used in) provided by operating activities of consolidated VIE-RSO (excluding eliminations)
(9,862
)
 
66,832


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

 
Nine Months Ended
 
September 30,
 
2014
 
2013
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Purchase of loans
(667,774
)
 
(555,051
)
Purchase of securities available-for-sale
(145,138
)
 
(120,599
)
Subtotal - Purchase of loans and securities by consolidated VIE-RSO, before eliminations
(812,912
)
 
(675,650
)
Eliminations
—

 
—

Subtotal - Purchase of loans and securities by consolidated VIE-RSO
(812,912
)
 
(675,650
)
Principal payments received on loans
315,778

 
487,606

Proceeds from sale of loans
76,314

 
314,112

Principal payments on securities available-for-sale
40,748

 
33,010

Proceeds from sale of securities available-for-sale
117,367

 
7,025

Principal payments received on loans - related parties
2,706

 
499

Subtotal - principal payments and proceeds from sales received by consolidated VIE-RSO, before eliminations
552,913

 
842,252

 
 
 
 
Decrease in restricted cash
18,328

 
30,079

Items included in "Other investing activity of consolidated VIE-RSO":
 
 
 
Investment in unconsolidated entity
8,911

 
(25,508
)
Acquisition of Moselle CLO S.A.
(30,433
)
 
—

Improvement of real estate held-for-sale
—

 
(404
)
Proceeds from sale of real estate held-for-sale
31,639

 
37,001

Distributions from investments in real estate
—

 
522

Improvements in investments in real estate held-for-sale
(225
)
 
(365
)
Investment in loans - related parties
(849
)
 
—

Purchase of furniture and fixtures
(69
)
 
(128
)
Acquisition of property and equipment
(362
)
 
—

Settlement of derivative instruments for investments
(19,245
)
 
—

Subtotal - Other investing activity of consolidated VIE-RSO, before eliminations
(10,633
)
 
11,118

Eliminations
(391
)
 
—

Subtotal - Other investing activity of consolidated VIE-RSO
(11,024
)
 
11,118

Net cash (used in) provided by investing activities of consolidated VIE-RSO
(excluding eliminations)
(252,304
)
 
207,799

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

 
Nine Months Ended
 
September 30,
 
2014
 
2013
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Items included in "Net borrowings (repayments) of debt by consolidated VIE-RSO"
 
 
 
Proceeds from borrowings:
 
 
 

Repurchase agreements
49,234

 
143,203

Warehouse agreement borrowings
43,000

 
—

CDO borrowings
235,344

 
—

Senior Secured Revolving Credit Facility
35,500

 
—

Reissuance of debt
39,635

 
—

Payments on borrowings:
 
 
 
Collateralized debt obligations
(301,040
)
 
(450,437
)
Mortgage payable payments
—

 
(13,600
)
Warehouse agreement payments
(33,719
)
 
—

Subtotal - net borrowings (repayments) of debt by consolidated VIE-RSO
67,954

 
(320,834
)
Distributions paid on common stock
(77,636
)
 
(68,010
)
Elimination of dividends paid to RAI
1,716

 
—

Distributions paid on common stock of consolidated VIE-RSO, after eliminations
(75,920
)
 
(68,010
)
Net proceeds from issuances of common stock (net of offering costs of $0 and $4,228)
—

 
114,018

Net proceeds from dividend reinvestment and stock purchase plan (net of offering costs of $0 and $0)
25,416

 
19,092

Proceeds from issuance of 8.5% Series A redeemable
preferred shares (net of offering costs of $203 and $3)
8,397

 
112

Proceeds from issuance of 8.25% Series B redeemable
preferred shares (net of offering costs of $363 and $1,091)
27,940

 
51,057

Proceeds from issuance of 8.625% Series C redeemable
preferred shares (net of offering costs of $4,005 and $0)
115,815

 
—

Subtotal - net proceeds from issuance of stock by consolidated VIE-RSO
177,568

 
184,279

   Minority interest equity
12,676

 
2,200

Payment of debt issuance costs
(7,284
)
 
(1,740
)
Settlement of derivative instruments
(23
)
 
—

Payment of equity to third party sub-note holders
(2,183
)
 
(6,952
)
Distributions paid on preferred stock
(7,907
)
 
(4,389
)
Subtotal - Other consolidated financing activity of consolidated VIE-RSO, before eliminations
(4,721
)
 
(10,881
)
Eliminations
175

 
—

Subtotal - Other consolidated financing activity of consolidated VIE-RSO
(4,546
)
 
(10,881
)
Net cash provided by (used in) financing activities of consolidated VIE-RSO, excluding eliminations
163,165

 
(215,446
)
Net (decrease) increase in cash and cash equivalents
(99,001
)
 
59,185

Cash and cash equivalents, beginning of year of consolidated VIE-RSO
262,270

 
85,278

Cash and cash equivalents, end of period of consolidated VIE-RSO
$
163,269

 
$
144,463

 
 
 
 
Supplemental disclosures:
 

 
 

  Interest expense paid in cash
$
26,782

 
$
28,391

  Income taxes paid in cash
$
3,293

 
$
8,997



RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

A.
Summary of Significant Accounting Policies - RSO
Residential Mortgage Loans Held for Sale
RSO originates residential loans to be funded by permanent investors. RSO may sell or retain the right to service a loan. Mortgage loans held for sale are valued at the lower of cost or market, determined on an aggregate basis for each type of loan after the net effect of any hedging activities including interest rate lock commitments and freestanding loan-related derivatives. Market value is determined using sales commitments to permanent investors or on current market rates for loans of similar quality and type. To the extent the transfer of assets qualifies as a sale, the asset is derecognized and the gain or loss is recorded on the sale date. In the event the transfer of assets does not qualify as a sale, the transfer would be treated as a secured borrowing.
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 the issuing entities 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 or deconsolidated.
Consolidated VIEs (RSO is the primary beneficiary)
Based on RSO management’s analysis, RSO is the primary beneficiary of 10 VIEs at September 30, 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, RCC CRE 2014, and Moselle CLO. In performing the primary beneficiary analysis for Apidos CDO I, Apidos CDO III, Apidos Cinco CDO, Apidos CLO VIII, RREF CDO 2006-1, RREF CDO 2007-1, RCC CRE Notes 2013 and RCC CRE 2014, it was determined that the parties that have the power to direct the activities that are most significant to each of these VIEs and who have 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 with 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.
Apidos CDO I, Apidos CDO III, Apidos Cinco CDO, Apidos CLO VIII, RREF CDO 2006-1, RREF CDO 2007-1, RCC CRE Notes 2013 and RCC CRE 2014 were formed on behalf of RSO 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. RSO's manager, a subsidiary of the Company, 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 $40.0 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.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

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.
On July 9, 2014, RCC Residential together with the Company and certain of its employees acquired through RCM Global a portfolio of securities from JP Morgan for $23.5 million.  The portfolio, is managed by the Company. RCC Residential contributed $15.0 million for a 63.8% membership interest. Each of the members of RCM Global will be allocated the revenue/expenses of RCM Global in accordance with its membership interest. RCM Global was determined not to be a VIE as there was sufficient equity at risk, it does not have disproportionate voting rights and its members have all of the following characteristics (1) the power to direct the activities (2) the obligation to absorb losses and (3) the right to receive residual returns. However, RSO consolidated RCM Global as a result of RSO's majority interest in it.
In September 2014, RSO contributed $17.5 million of capital to Pelium Capital, for an 80.4% interest. Pelium Capital is a specialized credit opportunity fund managed by the Company. RSO will receive 10% of the carried interest in the partnership for the first five years and can increase to 20% if RSO's capital contributions aggregate $40.0 million. The Company contributed securities of $2.8 million to the formation of Pelium Capital. Pelium Capital was determined not to be a VIE as there was sufficient equity at risk, it does not have disproportionate voting rights and its members have all of the following characteristics (1) the power to direct the activities (2) the obligation to absorb losses and (3) the right to receive residual returns. However, Pelium Capital was consolidated by RSO as a result of its majority ownership and RSO's unilateral kick-out rights held. The noncontrolling interest in this vehicle is owned by the Company.
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 RSO's 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 ten consolidated VIEs have no recourse to the general credit of RSO or the Company. However, RSO has in the past 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 and nine months ended September 30, 2014, RSO has provided financial support of $209,000 and $758,000, respectively. For the three and nine months ended September 30, 2013, RSO has provided $69,000 and $1.9 million of financial support, 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 that obligate RSO to provide financial support to any of its consolidated VIEs.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

The following table shows the classification and carrying value of assets and liabilities of RSO's consolidated VIEs as of September 30, 2014 (in thousands):
 
Apidos I
 
Apidos
III
 
Apidos
Cinco
 
Apidos
VIII
 
Whitney CLO I
 
RREF
2006-1
 
RREF
2007-1
 
RCC CRE Notes 2013
 
RCC CRE 2014
 
Moselle
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted cash (1)
$
15,366

 
$
3,529

 
$
24,663

 
$
5

 
$
80

 
$
20

 
$
250

 
$
3,337

 
$
—

 
$
33,383

 
$
80,633

Investment securities available-for-sale, pledged as collateral, at fair value
3,452

 
3,947

 
11,313

 
—

 
—

 
11,359

 
67,784

 
—

 
—

 
12,521

 
110,376

Loans, pledged as collateral
9,896

 
87,750

 
274,442

 
—

 
—

 
128,369

 
204,978

 
267,963

 
349,381

 
83,009

 
1,405,788

Loans held for sale
35,740

 
364

 
570

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
36,674

Interest receivable
(268
)
 
443

 
959

 
—

 
—

 
2,471

 
2,015

 
1,114

 
1,332

 
—

 
8,066

Prepaid assets
6

 
7

 
28

 
—

 
—

 
100

 
76

 
—

 
—

 
—

 
217

Principal paydown receivable
—

 
—

 
—

 
—

 
—

 
25,803

 
8,297

 
—

 
—

 
—

 
34,100

Other assets
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(12
)
 
—

 
(12
)
Total
assets (2)
$
64,192

 
$
96,040

 
$
311,975

 
$
5

 
$
80

 
$
168,122

 
$
283,400

 
$
272,414

 
$
350,701

 
$
128,913

 
$
1,675,842

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Borrowings
$
47,848

 
$
83,621

 
$
284,160

 
$
—

 
$
—

 
$
105,841

 
$
137,004

 
$
223,897

 
$
231,365

 
$
101,187

 
$
1,214,923

Accrued interest expense
218

 
46

 
289

 
—

 
—

 
44

 
99

 
172

 
123

 
289

 
1,280

Derivatives, at fair value
—

 
—

 
—

 
—

 
—

 
1,044

 
6,914

 
—

 
—

 
—

 
7,958

Accounts payable and other liabilities
22

 
48

 
25

 
195

 
—

 
11

 
1

 
—

 
10

 
(730
)
 
(418
)
Total liabilities
$
48,088

 
$
83,715

 
$
284,474

 
$
195

 
$
—

 
$
106,940

 
$
144,018

 
$
224,069

 
$
231,498

 
$
100,746

 
$
1,223,743

 
(1)
Includes $3.6 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 September 30, 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.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

LEAF Commercial Capital, Inc. ("LEAF")
On November 16, 2011, RSO and LEAF Financial, Inc. ("LEAF Financial"), a subsidiary of the Company), together with Eos Partners, L.P., a private investment firm, and its affiliates ("Eos"), formed LEAF Commercial Capital, Inc. ("LEAF"). In exchange for its prior interests in its lease related investments, RSO received 31,341 shares of Series A Preferred Stock (the "Series A Preferred Stock"), 4,872 shares of newly issued 8% Series B Redeemable Preferred Stock (the "Series B Preferred Stock") and 2,364 shares of newly issued Series D Redeemable Preferred Stock (the "Series D Preferred Stock"), collectively representing, on a fully-diluted basis assuming conversion, a 26.7% interest in LEAF. RSO’s investment in LEAF was valued at $36.3 million based on a third-party valuation. RSO's fully-diluted interest in LEAF assuming conversion is 28.3%. RSO's investment in LEAF was recorded at $40.2 million and $41.0 million as of September 30, 2014 and December 31, 2013, respectively.
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 28.3% 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 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 $9.9 million and $11.2 million at September 30, 2014 and December 31, 2013, respectively. RSO recognized fee income of $1.2 million and $4.0 million for the three and nine months ended September 30, 2014, respectively, and $1.2 million and $4.2 million for the three and nine months ended September 30, 2013, respectively. With respect to four of these CLOs, RSO determined that it does not hold a controlling financial interest and, therefore, is not the primary beneficiary. One of the CLOs was substantially 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 substantially liquidated Whitney CLO I, and, as a result, all of the assets were sold.
    

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

The following table shows the classification, carrying value and maximum exposure to loss with respect to RSO’s unconsolidated VIEs as of September 30, 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
$
40,157

 
$
1,548

 
$
—

 
$
41,705

 
41,705

Intangible assets
—

 
—

 
9,878

 
9,878

 
9,878

Total assets
40,157

 
1,548

 
9,878

 
51,583

 
 
 
 
 
 
 
 
 
 
 
 
Borrowings
—

 
51,154

 
—

 
51,154

 
N/A
Total liabilities
—

 
51,154

 
—

 
51,154

 
N/A
Net asset (liability)
$
40,157

 
$
(49,606
)
 
9,878

 
$
429

 
N/A
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 is summarized for the periods indicated (in thousands):
 
Nine Months Ended
 
September 30,
 
2014
 
2013
Non-cash financing activities include the following:
 
 
 

Distributions on common stock declared but not paid
$
26,629

 
$
25,447

Distributions on preferred stock declared but not paid
$
5,555

 
$
2,023

Issuance of restricted stock
$
890

 
$
242

D.
Investment securities, trading - RSO
Structured notes are CLO debt securities collateralized by syndicated bank loans. 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
September 30, 2014
 
 
 
 
 
 
 
Structured notes, trading
$
10,821

 
$
317

 
$
(2,017
)
 
$
9,121

RMBS, trading
1,897

 
—

 
(1,831
)
 
66

Total
$
12,718

 
$
317

 
$
(3,848
)
 
$
9,187

 
 
 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

 
 

Structured notes, trading
$
8,057

 
$
4,050

 
$
(1,000
)
 
$
11,107

RMBS, trading
1,919

 
—

 
(1,468
)
 
451

Total
$
9,976

 
$
4,050

 
$
(2,468
)
 
$
11,558

RSO sold two securities during the nine months ended September 30, 2014, for a realized gain of $2.5 million. RSO held 19 and eight investment securities, trading as of September 30, 2014 and December 31, 2013, respectively.



RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

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.
Asset-backed securities ("ABS") are CLO debt securities collateralized by syndicated bank loans. 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
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
September 30, 2014
 
 
 
 
 
 
 
CMBS
$
176,970

 
$
5,856

 
$
(7,510
)
 
$
175,316

RMBS
30,697

 
848

 
—

 
31,545

ABS
60,980

 
12,211

 
(1,435
)
 
71,756

Corporate bonds
2,413

 
12

 
(24
)
 
2,401

Total
$
271,060

 
$
18,927

 
$
(8,969
)
 
$
281,018

 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
CMBS
$
185,178

 
$
7,570

 
$
(12,030
)
 
$
180,718

ABS
30,775

 
1,644

 
(394
)
 
32,025

Corporate bonds
2,517

 
16

 
(70
)
 
2,463

Total
$
218,470

 
$
9,230

 
$
(12,494
)
 
$
215,206

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
September 30, 2014
 
 
 
 
 
Less than one year
$
50,160

 
$
56,395

 
3.84
%
Greater than one year and less than five years
142,079

 
133,098

 
5.03
%
Greater than five years and less than ten years
44,913

 
38,301

 
5.32
%
Greater than ten years
43,866

 
43,266

 
5.40
%
Total
$
281,018

 
$
271,060

 
4.97
%
 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

Less than one year
$
39,256

 
$
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
%
The contractual maturities of the CMBS investment securities available-for-sale range from October 2014 to December 2022.  The contractual maturities of the ABS investment securities available-for-sale range from October 2014 to October 2050.
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)
SEPTEMBER 30, 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
 
Unrealized
Losses
 
Number of Securities
 
Fair Value
 
Unrealized
Losses
 
Number of Securities
 
Fair Value
 
Unrealized
Losses
 
Number of Securities
As of September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CMBS
$
35,833

 
$
(580
)
 
18

 
$
27,065

 
$
(6,930
)
 
14

 
$
62,898

 
$
(7,510
)
 
32

ABS
13,792

 
(1,248
)
 
13

 
4,410

 
(187
)
 
7

 
18,202

 
(1,435
)
 
20

Corporate Bonds
1,439

 
(24
)
 
1

 
—

 
—

 
—

 
1,439

 
(24
)
 
1

Total temporarily
impaired securities
$
51,064

 
$
(1,852
)
 
32

 
$
31,475

 
$
(7,117
)
 
21

 
$
82,539

 
$
(8,969
)
 
53

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of 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.
RSO has no losses included in earnings due to other-than-temporary impairment charges during the three and nine months ended September 30, 2014, respectively. RSO had $255,000 and $276,000 of losses included in earnings due to the other-than-temporary impairment charges during the three and nine months ended September 30, 2013, respectively, on positions that supported RSO's CMBS investments.
The following table summarizes RSO's sales of investment securities available-for-sale, (in thousands, except number of securities):
 
Positions
Sold
 
Par Amount Sold
 
Realized Gain (Loss)
As of September 30, 2014
 
 
 
 
 
CMBS
3
 
$
15,970

 
$
480

ABS
3
 
$
6.947

 
$
3.484

 
 
 
 
 
 
As of December 31, 2013
 
 
 
 
 
CMBS
4
 
$
14,500

 
$
466

Corporate bonds
35
 
$
34,253

 
$
(474
)
The amounts above do not include redemptions. During the three and nine months ended September 30, 2014, RSO redeemed one and two corporate bond positions with a total par value of $1.0 million and $1.6 million, and recognized a gain of $48,000 and $48,000, respectively. During the three and nine months ended September 30, 2013, RSO had two corporate bond positions redeemed with a total par value of $3.5 million, and a recognized a gain of $11,000. During the three and nine months ended September 30, 2014, RSO had one ABS position redeemed with a total par value of $2.5 million, and recognized a gain of $25,500. During the three and nine months ended September 30, 2013, RSO had no ABS positions redeemed.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

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) recognized as of the periods indicated (in thousands) are:
 
September 30,
2014
 
December 31,
2013
CMBS
$
3,609

 
$
6,583

RMBS
$
1,876

 
$
—

ABS
$
2,431

 
$
2,394

Corporate bonds
$
42

 
$
(68
)
F.
Investments real estate - RSO
The table below summarizes RSO's investments in real estate (in thousands, except number of properties):
 
 
As of December 31, 2013
 
 
Book Value
 
Number of Properties
Multifamily property
 
$
22,107

 
1
Office property
 
10,273

 
1
Subtotal
 
32,380

 
 
Less:  Accumulated depreciation
 
(2,602
)
 
 
Investments in real estate
 
$
29,778

 
 
During the three and nine months ended September 30, 2014, RSO made no acquisitions. RSO has two assets classified as property available-for-sale at September 30, 2014. RSO confirmed the intent and ability to sell its office property and multifamily property in their present condition during the three and nine months ended September 30, 2014. These properties qualified for held for sale accounting treatment upon meeting all applicable criteria on or prior to September 30, 2014, at which time RSO ceased recording depreciation and amortization. As such, the assets associated with the office property and multifamily property, with a carrying value of $9.6 million and $19.8 million, respectively, are separately classified and included in property available-for sale on RSO's consolidated balance sheets at September 30, 2014. However, the anticipated sale of these properties did not qualify for treatment as 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 of both properties to close by the end of the year. Pre-tax earnings recorded on the office property for the three and nine months ended September 30, 2014 were gains of $48,000 and $23,000, respectively, and losses of $72,000 and $225,000 for the three and nine months ended September 30, 2013, respectively. Pre-tax earnings recorded on the multifamily property for the three and nine months ended September 30, 2014 was income of $119,000 and a loss of $4,000, respectively, and a loss of $93,000 and a gain of $13,000 for the three and nine months ended September 30, 2013, respectively. RSO's hotel property was sold in April 2014 for a gain of $3.0 million and is recorded in (loss) gain on sale of real estate on RSO's consolidated statements of income.
During the three and nine months ended September 30, 2013, RSO made no acquisitions and sold one of its multifamily properties for a gain of $16.6 million, which was recorded in (loss) gain on sale of real estate on RSO's consolidated statements of income.


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 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 (1)
 
Carrying
Value (2)
As of September 30, 2014
 
 
 
 
 
 
Commercial real estate loans:
 
 

 
 

 
 

Whole loans
 
$
1,028,393

 
$
(5,422
)
 
$
1,022,971

B notes
 
16,164

 
(57
)
 
16,107

Mezzanine loans
 
67,400

 
(95
)
 
67,305

Total commercial real estate loans
 
1,111,957

 
(5,574
)
 
1,106,383

Bank loans
 
642,419

 
(2,221
)
 
640,198

Residential mortgage loans, held for investment
 
2,825

 
—

 
2,825

Subtotal loans before allowances
 
1,757,201

 
(7,795
)
 
1,749,406

Allowance for loan loss
 
(4,507
)
 
—

 
(4,507
)
Total loans held for investment
 
1,752,694

 
(7,795
)
 
1,744,899

Bank loans held-for-sale
 
36,674

 
—

 
36,674

Residential mortgage loans held-for-sale
 
54,708

 
—

 
54,708

Total loans held-for-sale
 
91,382

 
—

 
91,382

Total loans
 
$
1,844,076

 
$
(7,795
)
 
$
1,836,281

 
 
 
 
 
 
 
As of 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
 
559,206

 
(4,033
)
 
555,173

Residential mortgage loans, held for investment
 
1,849

 
—

 
1,849

Subtotal loans before allowances
 
1,390,843

 
(7,510
)
 
1,383,333

Allowance for loan loss
 
(13,807
)
 
—

 
(13,807
)
Total loans held for investment
 
1,377,036

 
(7,510
)
 
1,369,526

Bank loans held-for-sale
 
6,850

 
—

 
6,850

Residential mortgage loans held-for-sale
 
15,066

 
—

 
15,066

Total loans held-for-sale
 
21,916

 
—

 
21,916

Total loans
 
$
1,398,952

 
$
(7,510
)
 
$
1,391,442

 
(1)
Amounts include deferred amendment fees of $133,000 and $216,000 and deferred upfront fees of $97,000 and $141,000 being amortized over the life of the bank loans as of September 30, 2014 and December 31, 2013, respectively.  Amounts include loan origination fees of $5.6 million and $3.3 million and loan extension fees of $0 and $73,000 being amortized over the life of the commercial real estate loans as of September 30, 2014 and December 31, 2013, respectively.
(2)
Substantially all loans are pledged as collateral under various borrowings at September 30, 2014 and December 31, 2013, respectively.


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

At September 30, 2014 and December 31, 2013, approximately 33.1% and 39.0%, respectively, of RSO’s commercial real estate loan portfolio was concentrated in California; approximately 8.9% and 6.4%, respectively, in Arizona; and approximately 21.0% and 14.6%, respectively, in Texas. At September 30, 2014 and December 31, 2013, approximately 15.5% and 15.8%, respectively, of RSO’s bank loan portfolio was concentrated in the collective industry grouping of healthcare, education and childcare. At September 30, 2014, approximately 56.5% of RSO's residential mortgage loans were originated in Georgia, 6.1% in North Carolina, 8.7% in Utah, 5.5% in Alabama and 7.0% in Virginia. At December 31, 2013, approximately 66.0% of the Company's residential mortgage loans were originated in Georgia, 9.0% in North Carolina, 7.0% each in Tennessee and Virginia and 6.0% in Alabama.
At September 30, 2014, RSO’s bank loan portfolio including, loans held-for-sale, consisted of $676.4 million (net of allowance of $464,000) of floating rate loans, which bear interest ranging between the three month LIBOR plus 1.5%, and the three month LIBOR plus 15.0% with maturity dates ranging from December 2014 to February 2024.
At December 31, 2013, RSO’s bank loan portfolio including, loans held-for-sale, 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 remaining lives of RSO’s bank loans held for investment, at amortized cost and loans held-for-sale, at the lower of cost or market (in thousands):
 
September 30,
2014
 
December 31,
2013
Less than one year
$
46,779

 
$
36,985

Greater than one year and less than five years
479,790

 
379,874

Five years or greater
150,303

 
145,164

 
$
676,872

 
$
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)
As of September 30, 2014
 
 
 
 
 
 
 
 
Whole loans, floating rate (1) (4) (5)
 
60
 
$
1,022,971

 
LIBOR plus 1.75% to
LIBOR plus 15.00%
 
January 2015 to February 2019
B notes, fixed rate
 
1
 
16,107

 
8.68%
 
April 2016
Mezzanine loans, floating rate
 
1
 
12,544

 
LIBOR plus 15.32%
 
April 2016
Mezzanine loans, fixed rate (6)
 
3
 
54,761

 
0.50% to 18.71%
 
September 2016 to
September 2021
Total (2) 
 
65
 
$
1,106,383

 
 
 
 
 
 
 
 
 
 
 
 
 
As of 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 $68.3 million and $13.7 million in unfunded loan commitments as of September 30, 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 $4.0 million and $10.4 million as of September 30, 2014 and December 31, 2013, respectively.
(3)
Maturity dates do not include possible extension options that may be available to the borrowers.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

(4)
As of September 30, 2014, floating rate whole loans includes $4.0 million and $12.0 million mezzanine components of two whole loans, which have fixed rates 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 September 30, 2014.
(6)
Fixed rate mezzanine loans include a mezzanine loan that was modified into two tranches, which both currently pay interest at 0.48%. 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 maturity of RSO’s commercial real estate loans, at amortized cost (in thousands):
Description
 
2014
 
2015
 
2016 and Thereafter
 
Total
As of September 30, 2014
 
 
 
 
 
 
 
 
B notes
 
$
—

 
$
—

 
$
16,107

 
$
16,107

Mezzanine loans
 
—

 
—

 
67,305

 
67,305

Whole loans
 
—

 
—

 
1,022,971

 
1,022,971

Total (1) 
 
$
—

 
$
—

 
$
1,106,383

 
$
1,106,383

 
 
 
 
 
 
 
 
 
As of 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 table provides information as to the lien position status of RSO's consolidated bank loans, (in thousands):
 
Amortized Cost
 
Apidos I
 
Apidos III
 
Apidos Cinco
 
Whitney CLO I
 
Northport LLC (1)
 
Moselle
 
Total
As of September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
First lien loans
$
9,895

 
$
87,107

 
$
270,598

 
—

 
$
101,021

 
$
80,721

 
$
549,342

Second lien loans
—

 
—

 
3,604

 
—

 
83,614

 
2,201

 
89,419

Third lien loans
—

 
—

 
—

 
—

 
—

 
—

 
—

Defaulted first lien loans
—

 
—

 
—

 
—

 
—

 
—

 
—

Defaulted second lien loans
—

 
972

 
379

 
—

 
—

 
86

 
1,437

Total
9,895

 
88,079

 
274,581

 
—

 
184,635

 
83,008

 
640,198

First lien loans held-for-sale, at fair value
35,738

 
365

 
571

 
—

 
—

 
—

 
36,674

Total
$
45,633

 
$
88,444

 
$
275,152

 
—

 
$
184,635

 
$
83,008

 
$
676,872

 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
First lien loans
$
79,483

 
$
126,890

 
$
296,368

 
$
72

 
$
31,974

 
—

 
$
534,787

Second lien loans
—

 
—

 
1,139

 
—

 
7,805

 
—

 
8,944

Third lien loans
3,020

 
2,475

 
2,463

 
—

 
—

 
—

 
7,958

Defaulted first lien loans
1,206

 
1,124

 
486

 
—

 
—

 
—

 
2,816

Defaulted second lien loans
334

 
334

 
—

 
—

 
—

 
—

 
668

Total
84,043

 
130,823

 
300,456

 
72

 
39,779

 
—

 
555,173

First lien loans held-for-sale, at fair value
537

 
651

 
1,189

 
—

 
4,473

 
—

 
6,850

Total
$
84,580

 
$
131,474

 
$
301,645

 
$
72

 
$
44,252

 
—

 
$
562,023

 
(1)
In September 2014, Resource TRS LLC and RCC Commercial transferred all loans to Northport LLC. At December 31, 2013, Resource TRS LLC and RCC Commercial held a total of $34.0 million and $10.3 million of loans, respectively, at amortized cost.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)


The following is a summary of the allocation of the allowance for loan loss (in thousands, except percentages) by asset class:
Description
 
Allowance for Loan Loss
 
Percentage of
Total Allowance
As of September 30, 2014
 
 
 
 
B notes
 
$
69

 
1.53%
Mezzanine loans
 
289

 
6.41%
Whole loans
 
3,685

 
81.76%
Bank loans
 
464

 
10.30%
Total
 
$
4,507

 
 
 
 
 
 
 
As of 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 September 30, 2014, RSO had recorded an allowance for loan losses on loans held for investment of $4.5 million consisting of a $464,000 allowance on RSO’s bank loan portfolio and a $4.0 million allowance on RSO’s commercial real estate portfolio.
As of December 31, 2013, RSO had recorded an allowance for loan losses on loans held for investment 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.


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

H.
Investments in unconsolidated entities - RSO
The following table shows RSO's investments in unconsolidated entities as of September 30, 2014 and December 31, 2013 and equity in net earnings (losses) of unconsolidated subsidiaries for the three and nine months ended September 30, 2014 and 2013 (in thousands):
 
 
 
 
 
 
 
Equity in Net Earnings (Losses) of Unconsolidated Subsidiary
 
 
 
Balance as of
 
Balance as of
 
For the three months ended
 
For the three months ended
 
For the three months ended
 
For the nine months ended
 
Ownership %
 
September 30,
2014
 
December 31, 2013
 
September 30,
2014
 
September 30,
2013
 
September 30,
2014
 
September 30, 2013
Värde Investment Partners, L.P.
7.5%
 
$
654

 
$
674

 
$
—

 
$
6

 
$
(19
)
 
$
49

RRE VIP Borrower, LLC
3% to 5%
 
—

 
—

 
770

 
(521
)
 
2,506

 
(735
)
Investment in LCC Preferred Stock
28.3%
 
40,157

 
41,016

 
13

 
(346
)
 
(859
)
 
(378
)
Investment in CVC
Global Credit Opportunities
Fund (1)
29.57%
 
18,181

 
16,177

 
47

 
433

 
2,004

 
526

Investment in Life Care Funding (1)
50.2%
 
—

 
1,530

 
—

 
(107
)
 
(75
)
 
(350
)
Investment in School Lane House (4)

 
—

 
975

 
57

 
—

 
1,106

 
—

Subtotal
 
 
58,992

 
60,372

 
887

 
(535
)
 
4,663

 
(888
)
Investment in RCT I and II (2)
3%
 
1,548

 
1,548

 
601

 
1,785

 
1,785

 
1,800

Investment in Preferred Equity (3)

 
—

 
7,149

 
—

 
332

 
410

 
821

Total
 
 
$
60,540

 
$
69,069

 
$
1,488

 
$
1,582

 
$
6,858

 
$
1,733

 
(1)
RSO began consolidating this investment during the first quarter of 2014. Ownership % represents ownership after consolidation.
(2)
For the three and nine months ended September 30, 2014 and 2013, these amounts are recorded in interest expense on RSO's consolidated statements of income.
(3)
For the three and nine months ended September 30, 2014 and 2013, these amounts are recorded in interest income on loans on RSO's consolidated statements of income.
(4)
Investment in School Lane House and preferred equity were sold as of September 30, 2014.
In January 2013, Long Term Care Conversion ("LTCC") invested $2.0 million into Life Care Funding, LLC ("LCF") for the purpose of originating and acquiring life settlement contracts. In February 2014, RSO invested an additional $1.4 million which resulted in the consolidation of LCF during the first quarter of 2014.    

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

I.
Financing receivables - RSO
The following tables show the allowance for loan losses and recorded investments in loans for the years indicated (in thousands):
 
Commercial Real Estate Loans
 
Bank Loans
 
Residential Mortgage Loans
 
Loans Receivable-Related Party
 
Total
As of September 30, 2014
 
 
 
 
 
 
 
 
 
Allowance for Loan Losses:
 
 
 
 
 
 
 
 
 
Allowance for losses at January 1, 2014
$
10,416

 
$
3,391

 
$
—

 
$
—

 
$
13,807

(Recovery) provision for loan losses
(3,708
)
 
1,033

 
—

 
936

 
(1,739
)
Loans charged-off
(2,665
)
 
(3,960
)
 
—

 
—

 
(6,625
)
Allowance for losses at September 30, 2014
$
4,043

 
$
464

 
$
—

 
$
936

 
$
5,443

Ending balance:
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
—

 
$
464

 
$
—

 
$
936

 
$
1,400

Collectively evaluated for impairment
$
4,043

 
$
—

 
$
—

 
$
—

 
$
4,043

Loans acquired with deteriorated credit quality
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans:
 

 
 

 
 

 
 

 
 

Ending balance:
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
165,960

 
$
2,340

 
$
—

 
$
5,108

 
$
173,408

Collectively evaluated for impairment (1)
$
940,423

 
$
637,772

 
$
2,825

 
$
—

 
$
1,581,020

Loans acquired with deteriorated credit quality
$
—

 
$
86

 
$
—

 
$
—

 
$
86

 
 
 
 
 
 
 
 
 
 
As of December 31, 2013
 

 
 

 
 

 
 

 
 

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

 
$
9,705

 
$
—

 
$
—

 
$
17,691

Provision for loan losses
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: (2)
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
194,403

 
$
3,554

 
$
—

 
$
6,966

 
$
204,923

Collectively evaluated for impairment
$
631,908

 
$
558,469

 
$
16,915

 
$
—

 
$
1,207,292

Loans acquired with deteriorated credit quality
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
(1)
Loan ending balance contains $83.0 million of loan value for which the fair value option has been elected. As such, no allowance for loan losses has been recognized for these loans.
(2)
Loan balances as of December 31, 2013 include loans held-for-sale.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 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 factors 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 September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank loans
$
632,588

 
$
—

 
$
6,173

 
$
—

 
$
1,437

 
$
36,674

 
$
676,872

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 two loans with an amortized cost of $1.4 million as of September 30, 2014. Due to the consolidation of Moselle CLO in February 2014, RSO acquired four loans with deteriorated credit quality with an amortized cost of $86,000 as of September 30, 2014. 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 factors 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
 
Total
As of September 30, 2014
 
 
 
 
 
 
 
 
 
Whole loans
$
990,471

 
$
32,500

 
$
—

 
$
—

 
$
1,022,971

B notes
16,107

 
—

 
—

 
—

 
16,107

Mezzanine loans
45,447

 
21,858

 
—

 
—

 
67,305

 
$
1,052,025

 
$
54,358

 
$
—

 
$
—

 
$
1,106,383

 
 
 
 
 
 
 
 
 
 
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

All of RSO’s commercial real estate loans were current as of September 30, 2014 and December 31, 2013.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

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.
Loans Receivable - Related Party
RSO recorded a $936,000 allowance for loan loss during the nine months ended September 30, 2014 on a related party loan due to defaults on two individually significant credits in the related party fund holding the loan that caused an unplanned cash flow deficiency.
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
As of September 30, 2014
 

 
 

 
 
 
 
 
 
 
 
 
 
Whole loans
$
—

 
$
—

 
$
—

 
$
—

 
$
1,022,971

 
$
1,022,971

 
$
—

B notes
—

 
—

 
—

 
—

 
16,107

 
16,107

 
—

Mezzanine loans
—

 
—

 
—

 
—

 
67,305

 
67,305

 
—

Bank loans (1) (2)
774

 
—

 
1,652

 
2,426

 
674,446

 
676,872

 
—

Residential mortgage loans (3)
—

 
251

 
117

 
368

 
57,165

 
57,533

 
—

Loans receivable-related party
—

 
—

 
—

 
—

 
5,108

 
5,108

 
—

Total loans
$
774

 
$
251

 
$
1,769

 
$
2,794

 
$
1,843,102

 
$
1,845,896

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2013
 

 
 

 
 

 
 

 
 

 
 

 
 

Whole loans
$
—

 
$
—

 
$
—

 
$
—

 
$
745,789

 
$
745,789

 
$
—

B notes
—

 
—

 
—

 
—

 
16,205

 
16,205

 
—

Mezzanine loans
—

 
—

 
—

 
—

 
64,317

 
64,317

 
—

Bank loans (2)
—

 
—

 
3,554

 
3,554

 
558,469

 
562,023

 
—

Residential mortgage loans (3)
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

 
$
—

 
(1)
Contains loans for which the fair value method was elected with an unpaid principal balance of $4.5 million with a fair value of $86,000 at September 30, 2014.
(2)
Contains $36.7 million and $6.9 million of bank loans held for sale at September 30, 2014 and December 31, 2013, respectively.
(3)
Contains $54.7 million and $15.1 million of residential mortgage loans held for sale at September 30, 2014 and December 31, 2013, respectively.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 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
As of September 30, 2014
 
 
 
 
 
 
 
 
 
Loans without a specific valuation allowance:
 
 
 
 
 
 
 
 
 
Whole loans
$
127,888

 
$
127,888

 
$
—

 
$
126,591

 
$
11,882

B notes
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Mezzanine loans
$
38,072

 
$
38,072

 
$
—

 
$
38,072

 
$
2,543

Bank loans
$
86

 
$
86

 
$
—

 
$
86

 
$
—

Residential mortgage loans
$
2,825

 
$
2,825

 
$
—

 
$
2,825

 
$
107

Loans receivable - related party
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans with a specific valuation allowance:
 

 
 

 
 

 
 

 
 

Whole loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

B notes
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Mezzanine loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Bank loans
$
2,340

 
$
2,340

 
$
(464
)
 
$
287

 
$
—

Residential mortgage loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans receivable - related party
$
3,929

 
$
3,929

 
$
(936
)
 
$
4,831

 
$
221

 
 
 
 
 
 
 
 
 
 
Total:
 

 
 

 
 

 
 

 
 

Whole loans
$
127,888

 
$
127,888

 
$
—

 
$
126,591

 
$
11,882

B notes
—

 
—

 
—

 
—

 
—

Mezzanine loans
38,072

 
38,072

 
—

 
38,072

 
2,543

Bank loans
2,426

 
2,426

 
(464
)
 
373

 
—

Residential mortgage loans
2,825

 
2,825

 
—

 
2,825

 
107

Loans receivable - related party
3,929

 
3,929

 
(936
)
 
4,831

 
221

 
$
175,140

 
$
175,140

 
$
(1,400
)
 
$
172,692

 
$
14,753

 
Recorded Balance
 
Unpaid Principal Balance
 
Specific Allowance
 
Average Investment in Impaired Loans
 
Interest Income Recognized
As of 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)
SEPTEMBER 30, 2014
(unaudited)

Troubled- Debt Restructurings
The following tables show troubled-debt restructurings in RSO's loan portfolio (in thousands):
 
Number of Loans
 
Pre-Modification Outstanding Recorded Balance
 
Post-Modification Outstanding Recorded Balance
Three Months Ended September 30, 2014
 
 
 
 
 
Whole loans
2

 
$
16,039

 
$
16,039

B notes
—

 
—

 
—

Mezzanine loans
1

 
38,072

 
38,072

Bank loans
—

 
—

 
—

Loans receivable - related party
—

 
—

 
—

Total loans
3

 
$
54,111

 
$
54,111

 
 
 
 
 
 
Three Months Ended September 30, 2013
 
 
 
 
 
Whole loans
2

 
$
48,374

 
$
52,716

B notes
—

 
—

 
—

Mezzanine loans
—

 
—

 
—

Bank loans
—

 
—

 
—

Lease receivables
—

 
—

 
—

Loans receivable - related party
—

 
—

 
—

Total loans
2

 
$
48,374

 
$
52,716

 
 
 
 
 
 
Nine Months Ended September 30, 2014
 
 
 
 
 
Whole loans
2

 
$
16,039

 
$
16,039

B notes
—

 
—

 
—

Mezzanine loans
1

 
38,072

 
38,072

Bank loans
—

 
—

 
—

Loans receivable - related party
—

 
—

 
—

Total loans
3

 
$
54,111

 
$
54,111

 
 
 
 
 
 
Nine Months Ended September 30, 2013
 
 
 
 
 
Whole loans
4

 
$
104,702

 
$
109,044

B notes
—

 
—

 
—

Mezzanine loans
—

 
—

 
—

Bank loans
—

 
—

 
—

Lease receivables
—

 
—

 
—

Loans receivable - related party
1

 
6,592

 
6,592

Total loans
5

 
$
111,294

 
$
115,636

As of September 30, 2014 and 2013, there were no troubled-debt restructurings that subsequently defaulted.


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

J.
Business Combinations - RSO
On October 31, 2013, RSO through its taxable REIT subsidiary ("TRS"), RCC Residential, completed a business combination whereby it acquired the assets of Primary Capital Mortgage, LLC ("PCM"), an Atlanta based company that originates and services residential mortgage loans, for approximately $7.6 million in cash. As part of this transaction, a key employee of PCM was granted approximately $800,000 of RSO’s restricted stock. Any grant for employees of PCM are accounted for as compensation and are being amortized to equity compensation expense over the vesting period. Dividends declared on the stock while unvested are recorded as a general and administrative expense. Dividends declared after the stock vests will be recorded as a distribution. For the three and nine months ended September 30, 2014, $185,000 and $545,000 of amortization of the stock grants were recorded to RSO's equity compensation expense on its consolidated statement of income and $52,000 and $156,000 of expense related to dividends on unvested shares was recorded to general and administrative expenses on its consolidated statement of income for the three and nine months ended September 30, 2014, respectively. There was no such expense of the three and nine months ended September 30, 2013.
Upon acquisition of PCM, RSO recognized an intangible asset of $600,000 related to its wholesale-correspondent relationships, which have a finite life of approximately two years.
RSO has allocated the purchase price 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 consolidated statements of income.     
The following table sets forth the allocation of the purchase price (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

On February 27, 2014, RSO made an additional capital contribution to LCF which gave RSO majority ownership at 50.2%. As a result, RSO began consolidating the LCF joint venture. The joint venture was established for the purpose of originating and acquiring life settlement contracts through a financing facility. Although no further material purchase price adjustments for LCF 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.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

In February 2014, RSO purchased a $40.0 million interest in Moselle CLO, a European securitization, in the form of subordinate notes representing 100% of the Class 1 Subordinated Notes and 67.9% of the Class 2 subordinated Notes, which was accounted for as a business combination. The assets of Moselle CDO consist of European senior secured loans, U.S. senior secured loans, U.S. senior unsecured loans, U.S. second lien loans, European mezzanine loans, and a limited amount of synthetic securities and other eligible debt obligations. 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. While neither RSO nor any of its affiliates manages 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.
K.
Intangible assets - RSO
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 6.8 years and 7.7 years at September 30, 2014 and December 31, 2013, respectively and the accumulated amortization was $11.6 million and $12.5 million at September 30, 2014 and December 31, 2013, respectively.
The following table summarizes intangible assets (in thousands).
 
Asset Balance
 
Accumulated Amortization
 
Net Asset
As of September 30, 2014
 
 
 
 
 
Investment in RCAM
$
21,213

 
$
(11,325
)
 
$
9,888

Investment in PCM:
 
 
 
 


Wholesale or correspondent relationships
600

 
(234
)
 
366

Total intangible assets
$
21,813

 
$
(11,559
)
 
$
10,254

 
 
 
 
 
 
As of 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 market leases
29

 
(29
)
 
—

Investment in PCM:
 
 
 
 
 
Wholesale or correspondent relationships
600

 
(42
)
 
558

Total intangible assets
$
24,303

 
$
(12,481
)
 
$
11,822

For the three and nine months ended September 30, 2014, RSO recognized $1.2 million and $4.0 million, respectively, of fee income related to the investment in RCAM. For the three and nine months ended September 30, 2013, RSO recognized $1.2 million and $4.2 million, respectively, of fee income related to the investment in RCAM.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

L.    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 is summarized in the following table (in thousands, except percentages):
 
Outstanding Borrowings
 
Unamortized Issuance Costs and Discounts
 
Principal Outstanding
 
Weighted Average Borrowing Rate
 
Weighted Average Remaining Maturity
 
Value of Collateral
As of September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
RREF CDO 2006-1 Senior Notes
$
105,841

 
$
1

 
$
105,842

 
1.93
%
 
31.9 years
 
$
139,267

RREF CDO 2007-1 Senior Notes
137,004

 
242

 
137,246

 
1.06
%
 
32.0 years
 
273,839

RCC CRE Notes 2013
223,897

 
2,943

 
226,840

 
2.10
%
 
14.2 years
 
269,371

RCC CRE 2014
231,365

 
3,979

 
235,344

 
1.44
%
 
17.6 years
 
347,511

Apidos CDO I Senior Notes
47,848

 
—

 
47,848

 
2.54
%
 
2.8 years
 
63,956

Apidos CDO III Senior Notes
83,621

 
—

 
83,621

 
1.11
%
 
6.0 years
 
94,516

Apidos Cinco CDO Senior Notes
284,160

 
358

 
284,518

 
0.74
%
 
5.6 years
 
303,385

Moselle CLO S.A. Senior Notes, at fair value (6)
94,904

 
—

 
94,904

 
1.19
%
 
5.3 years
 
127,312

Moselle CLO S.A. Securitized Borrowings, at fair value (1)
5,212

 
—

 
5,212

 
1.19
%
 
N/A
 
—

Unsecured Junior Subordinated Debentures (2)
51,154

 
394

 
51,548

 
0.04
%
 
22.1 years
 
—

6.0% Convertible Senior Notes
107,979

 
7,021

 
115,000

 
6.00
%
 
4.2 years
 
—

CRE - Term Repurchase Facilities (3)
55,280

 
654

 
55,934

 
2.32
%
 
20 days
 
83,133

CMBS - Term Repurchase Facility (4)
21,559

 
—

 
21,559

 
1.43
%
 
23 days
 
26,540

RMBS - Term Repurchase Facility (5)
22,705

 
55

 
22,760

 
1.15
%
 
1 day
 
28,533

Residential Mortgage Financing Agreements
48,885

 
—

 
48,885

 
3.56
%
 
278 days
 
68,417

CMBS - Short Term Repurchase Agreements
36,633

 
—

 
36,633

 
1.53
%
 
23 days
 
47,224

Senior Secured Revolving Credit Agreement (7)
32,911

 
2,589

 
35,500

 
4.13
%
 
3 years
 
184,167

Total
$
1,590,958

 
$
18,236

 
$
1,609,194

 
1.98%
 
12.2 years
 
$
2,057,171





RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

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

 
$
205

 
$
94,209

 
1.87
%
 
32.6 years
 
$
169,115

RREF CDO 2007-1 Senior Notes
177,837

 
719

 
178,556

 
0.84
%
 
32.8 years
 
318,933

RCC CRE Notes 2013
256,571

 
4,269

 
260,840

 
2.03
%
 
15.0 years
 
305,586

Apidos CDO I Senior Notes
87,131

 
—

 
87,131

 
1.68
%
 
3.6 years
 
103,736

Apidos CDO III Senior Notes
133,209

 
117

 
133,326

 
0.88
%
 
6.7 years
 
145,930

Apidos Cinco CDO Senior Notes
321,147

 
853

 
322,000

 
0.74
%
 
6.4 years
 
342,796

Whitney CLO I Securitized Borrowings (1)
440

 
—

 
440

 
—
%
 
N/A
 
885

Unsecured Junior Subordinated Debentures (2)
51,005

 
543

 
51,548

 
4.19
%
 
22.8 years
 
—

6.0% Convertible Senior Notes
106,535

 
8,465

 
115,000

 
6.00
%
 
4.9 years
 
—

CRE - Term Repurchase Facilities (3)
29,703

 
1,033

 
30,736

 
2.67
%
 
21 days
 
48,186

CMBS - Term Repurchase Facility (4)
47,601

 
12

 
47,613

 
1.38
%
 
21 days
 
56,949

Residential Mortgage Financing Agreements
14,627

 
—

 
14,627

 
4.24
%
 
56 days
 
16,487

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 Moselle CLO Securitized Borrowings, 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)
Amounts also include accrued interest costs of $43,000 and $26,000 related to CRE repurchase facilities as of September 30, 2014 and December 31, 2013, respectively.
(4)
Amounts also include accrued interest costs of $23,000 and $22,000 related to CMBS repurchase facilities as of September 30, 2014 and December 31, 2013, respectively. Amounts do not reflect CMBS repurchase agreement borrowings that are components of linked transactions.
(5)
Amount also includes accrued interest costs of $21,000 related to RMBS repurchase facilities as of September 30, 2014.
(6)
The fair value option has been elected for the borrowings associated with Moselle CLO. As such, the outstanding borrowings and principal outstanding amounts are states at fair value. The unpaid principal amounts of these borrowings were $95.0 million at September 30, 2014.
(7)
Weighted average borrowing rate included $25.0 million borrowed at the JP Morgan Chase Bank prime rate to fund the closing on investments. These borrowings were subsequently converted to the lower contracted LIBOR rate and began accruing interest at 2.66% as of October 1, 2014.


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

Securitizations
Securitization
 
Closing Date
 
Maturity Dates
 
Reinvestment
Period End
 
Total Note
Paydowns as of September 30, 2014
 
 
 
 
 
 
 
 
(in millions)
RREF CDO 2006-1 Senior Notes
 
August 2006
 
August 2046
 
September 2011
 
$
117.1

RREF CDO 2007-1 Senior Notes
 
June 2007
 
September 2046
 
June 2012
 
$
129.8

RCC CRE Notes 2013
 
December 2013
 
December 2028
 
N/A
 
$
34.0

RCC CRE 2014
 
July 2014
 
April 2032
 
N/A
 
$
—

Apidos CDO I Senior Notes
 
August 2005
 
July 2017
 
July 2011
 
$
271.7

Apidos CDO III Senior Notes
 
May 2006
 
September 2020
 
June 2012
 
$
178.9

Apidos Cinco CDO Senior Notes
 
May 2007
 
May 2020
 
May 2014
 
$
36.3

Moselle CLO S.A. Senior Notes
 
October 2005
 
January 2020
 
January 2012
 
$
68.6

Moselle CLO S.A. Securitized Borrowings
 
October 2005
 
January 2020
 
January 2012
 
$
—

The investments held by RSO's securitizations have collateralized the debt issued by the securitizations and, as a result, are not available to RSO, its creditors, or stockholders. All senior notes purchased and retained by RSO as of September 30, 2014 eliminate in the RSO consolidation.
RCC CRE 2014
In July 2014, RSO closed RCC CRE 2014, a $353.9 million CRE securitization transaction that provided financing for transitional commercial real estate loans.  The investments held by RCC CRE 2014 securitized the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders.  RCC CRE 2014 issued a total of $235.3 million of senior notes at par to unrelated investors.  RCC Real Estate purchased 100% of the Class C senior notes (rated B2:Moody's) for $17.7 million.  In addition, RREF 2014-CRE2 Investor, LLC, a subsidiary of RCC Real Estate, purchased a $100.9 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 RCC CRE 2014, 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 RCC CRE 2014. There is no reinvestment period for RCC CRE 2014, which will result in the sequential paydown of notes as underlying collateral matures and paydown.
At closing, the senior notes issued to investors by RCC CRE 2014 consisted of the following classes: (i) $196.4 million of Class A notes bearing interest at one-month LIBOR plus1.05%; (ii) $38.9 million of Class B notes bearing interest at one-month LIBOR plus 2.5%; and (iii) $17.7 million of Class C notes bearing interest at one-month LIBOR plus 4.25%.  All of the notes issued mature in April 2032, although RSO has the right to call the notes anytime after July 2016 until maturity.  The weighted average interest rate on all notes issued to outside investors was 1.44% at September 30, 2014.
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 Moselle CLO. 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%; (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 1.19% at September 30, 2014.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

Repurchase and Mortgage Finance 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 is summarized in the following table (dollars in thousands):
 
September 30, 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)
$
21,559

 
$
26,540

 
30
 
1.43%
 
$
47,601

 
$
56,949

 
44
 
1.38%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CRE Term Repurchase Facilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo Bank (2)
47,704

 
71,822

 
4
 
2.21%
 
30,003

 
48,186

 
8
 
2.67%
Deutsche Bank AG (3)
7,576

 
11,311

 
1
 
3.03%
 
(300
)
 
—

 
—
 
—%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-Term Repurchase Agreements - CMBS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deutsche Bank Securities, LLC
25,575

 
29,529

 
8
 
1.47%
 
—

 
—

 
—
 
—%
Wells Fargo Securities, LLC
11,058

 
17,695

 
1
 
1.66%
 
—

 
—

 
—
 
—%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RMBS Term Repurchase Facility
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo Bank (4)
22,705

 
28,533

 
6
 
1.15%
 
—

 
—

 
—
 
—%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Mortgage Financing Agreements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New Century Bank
16,526

 
17,831

 
94
 
3.45%
 
11,916

 
13,089

 
74
 
4.17%
ViewPoint Bank, NA
4,395

 
6,079

 
22
 
2.78%
 
2,711

 
3,398

 
17
 
4.58%
Wells Fargo Bank
27,963

 
44,508

 
66
 
3.75%
 
—

 
—

 
—
 
—%
Totals
$
185,061

 
$
253,848

 
 
 
 
 
$
91,931

 
$
121,622

 
 
 
 
 
(1)
The Wells Fargo CMBS term facility borrowing includes zero and $12,000 of deferred debt issuance costs as of September 30, 2014 and December 31, 2013, respectively.
(2)
The Wells Fargo CRE term repurchase facility borrowing includes $260,000 and $732,000 of deferred debt issuance costs as of September 30, 2014 and December 31, 2013, respectively.
(3)
The Deutsche Bank term repurchase facility includes $395,000 and $300,000 of deferred debt issuance costs as of September 30, 2014 and December 31, 2013, respectively.
(4)
The Wells Fargo RMBS term repurchase facility includes $55,000 of deferred debt issuance costs as of September 30, 2014.
    

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 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.
 
September 30, 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
$
5,153

 
$
6,736

 
7
 
1.66%
 
$
6,506

 
$
8,345

 
7
 
1.65%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CRE Term
   Repurchase
   Facility
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo Bank
—

 
—

 
—
 
—%
 
—

 
—

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

 
—

 
—
 
—%
 
17,020

 
24,814

 
4
 
0.99%
Wells Fargo Securities, LLC
4,146

 
6,262

 
2
 
1.37%
 
21,969

 
30,803

 
9
 
1.19%
Deutsche Bank Securities, LLC
20,437

 
30,869

 
9
 
1.46%
 
18,599

 
29,861

 
9
 
1.43%
Totals
$
29,736

 
$
43,867

 
 
 
 
 
$
64,094

 
$
93,823

 
 
 
 

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 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
September 30, 2014
 
 
 
 
 
CMBS Term Repurchase Facility
 
 
 
 
 
Wells Fargo Bank, National Association (2)
$
7,353

 
20
 
1.43%
 
 
 
 
 
 
RMBS Term Repurchase Facility
 
 
 
 
 
Wells Fargo Bank, National Association
$
5,233

 
1
 
1.15%
 
 
 
 
 
 
CRE Term Repurchase Facilities
 
 
 
 
 
Wells Fargo Bank, National Association
$
23,677

 
20
 
2.21%
Deutsche Bank Securities, LLC
$
3,266

 
20
 
3.03%
 
 
 
 
 
 
Short-Term Repurchase Agreements - CMBS
 
 
 
 
 
JP Morgan Securities, LLC (3)
$
—

 
0
 
—%
Wells Fargo Securities, LLC
$
23,677

 
8
 
1.66%
Deutsche Bank Securities, LLC
$
3,326

 
29
 
1.47%
 
 
 
 
 
 
Residential Mortgage Financing Agreements
 
 
 
 
 
New Century Bank
$
17,016

 
334
 
3.45%
View Point Bank, NA
$
4,485

 
91
 
2.78%
Wells Fargo Bank
$
32,494

 
275
 
3.75%
 
 
 
 
 
 
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)
$5.2 million and $6.5 million of linked repurchase agreement borrowings are being included as derivative instruments as of September 30, 2014 and December 31, 2013, respectively.
(3)
There are no linked repurchase agreement borrowings being included as derivative instruments as of September 30, 2014. As of December 31, 2013 $17.0 million of linked repurchase agreement borrowings were being included as derivative instruments.





RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

RMBS - Term Repurchase Facility
In June 2014, RSO's wholly-owned subsidiaries, RCC Resi Portfolio and RCC Resi TRS (the “Sellers”) entered into a master repurchase and securities contract (the “2014 Facility”) with Wells Fargo.  Under the 2014 Facility, from time to time the parties may enter into transactions in which the Sellers and Wells Fargo agree to transfer from the Sellers to Wells Fargo all of their right, title and interest to certain residential mortgage backed securities and other assets against the transfer of funds by Wells Fargo to the Sellers, with a simultaneous agreement by Wells Fargo to transfer back to the Sellers such assets at a date certain or on demand, against the transfer of funds from the Sellers to Wells Fargo. The maximum amount of the 2014 Facility is $285.0 million which has an original one year term with a one year option to extend, and a maximum interest rate of 1.45% plus a 4.00% pricing margin.  The 2014 Facility has a current maturity date of June 22, 2015.
The 2014 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 Sellers to repay the purchase price for purchased assets.
The 2014 Facility also contains margin call provisions relating to a decline in the market value of a security. Under these circumstances, Wells Fargo may require the Sellers to transfer cash in an amount sufficient to eliminate any margin deficit resulting from such a decline.
Under the terms of the 2014 Facility and pursuant to a guarantee agreement dated June 20, 2014 (the “2014 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 Sellers to Wells Fargo under or in connection with the 2014 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 Sellers with respect to Wells Fargo under each of the governing documents. The 2014 Guaranty includes covenants that, among other things, limit the RSO's leverage and debt service ratios and require maintenance of certain levels of cash and net worth. Sellers and RSO were in compliance with all financial debt covenants under the 2014 Facility and 2014 Guaranty as of September 30, 2014.
CRE - Term Repurchase Facilities
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, that ended on July 19, 2014. RSO paid an extension fee of 0.25% of the maximum facility amount to exercise the first of two one-year extensions at the option of SPE 5. The facility's current termination date is July 19, 2015. RSO guaranteed SPE 5's performance of its obligations under the DB Facility.

Residential Mortgage Financing Agreements
PCM 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 August 30, 2015, which was amended from the original terms over the course of seven amendments.
At June 30, 2014, PCM received a waiver from ViewPoint Bank, NA on a covenant that requires PCM to maintain consolidated net income of at least one dollar for the preceding twelve month period and not allow PCM'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. PCM was in compliance with all other financial covenant requirements under the agreement as of September 30, 2014.

RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

In July 2014, PCM entered into a master repurchase agreement with Wells Fargo Bank, NA ("Wells Fargo") to finance the acquisition of residential mortgage loans. The Wells Fargo facility contains provisions that provide Wells Fargo with certain rights if certain credit events have occurred with respect to one or more assets financed on the Wells Fargo facility to either require PCM 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 Wells Fargo facility, or may only be required to the extent of the availability of such payments. The facility has a maximum amount of $75.0 million and a termination date of July 2, 2015.
The Wells Fargo 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 PCM's business as a mortgage banker as presently conducted; breaches of covenants and/or certain representations and warranties; performance defaults by PCM; and a judgment in an amount greater than 250,000 against PCM. 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 Wells Fargo facility and the liquidation by Wells Fargo of assets then subject to the Wells Fargo facility.
At September 30, 2014, PCM received a waiver from Wells Fargo Bank, NA on covenants that require PCM to maintain a combined loan-to-value ratio of at least 75% and a minimum adjusted tangible net worth of $30.0 million. The waiver removed all existing defaults and waived the required covenants as of September 30, 2014. PCM is in compliance with all other covenants under the agreement as of September 30, 2014.
Senior Secured Revolving Credit Facility
Effective September 18, 2014, RSO, through an indirect wholly-owned subsidiary, Northport LLC, closed a $110.0 million syndicated senior secured revolving credit facility with JP Morgan as the agent bank. On September 30, 2014, the accordion feature of the facility was exercised to bring the facility capacity to $225.0 million and concurrently an additional $15.0 million was secured through the addition of Customer's Bank to the syndicate, bringing the effective commitment to $125.0 million. At September 30, 2014, $35.5 million was outstanding on the facility. The facility bears interest at optional rates as either the Prime Rate or LIBOR/the Federal Funds rate as base rates, plus a spread, plus an applicable margin (either 1.50% or 2.50%). RSO guaranteed Northport LLC's performance of its obligations under this credit facility.
M. Related party transactions - RSO
Relationship with LEAF. LEAF Financial Corporation 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.  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 a further 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 a further amendment to extend the maturity to February 15, 2015. Principal payments of $1.8 million were made during nine months ended September 30, 2014. During the three and nine months ended September 30, 2014, RSO recorded an allowance for loan loss on this loan of $236,000 and $936,000, respectively. The loan amount outstanding at September 30, 2014 and December 31, 2013 was $3.9 million (net of allowance of $936,000) and $5.7 million, respectively.
RSO's resulting interest from the formation of LEAF is accounted for under the equity method. For the three and nine months ended September 30, 2014, RSO recorded a gain of $13,000 and a loss of $859,000, respectively, and for the three and nine months ended September 30, 2013,recorded earnings of $304,000 and losses of $32,000 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 $40.2 million and $41.0 million as of September 30, 2014 and December 31, 2013, respectively.


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

Relationship with CVC Credit Partners. 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 and nine months ended September 30, 2014, CVC Credit Partners earned subordinated fees of $309,000 and $1.0 million, respectively. For the three and nine months ended September 30, 2013, CVC Credit Partners earned subordinated fees of $160,000 and $515,000. In October 2012, RSO purchased 66.6% of the preferred equity in one of the RCAM CLOs. In May 2013, RSO purchased additional equity interest in this CLO, increasing its ownership to 68.3%. In September 2013, this CLO was liquidated 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. which generally invests in assets through 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 since RSO is a related party of CVC Credit Partners. For the three and nine months ended September 30, 2014, RSO recorded earnings of $47,000 and $2.0 million, which was recorded in equity in net earnings (losses) of unconsolidated subsidiaries on RSO's consolidated statements of income. For the three and nine months ended September 30, 2013, RSO recorded earnings of $93,000. The fund's investment balance of $18.2 million and $16.2 million as of September 30, 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 and nine months ended September 30, 2014, RSO paid Ledgewood $45,000 and $202,000, respectively, and for the three and nine months ended September 30, 2013 $70,000 and $155,000 in connection with legal services rendered to RSO.



RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

N. Fair value of financial instruments
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
As of September 30, 2014
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investment securities, trading
$
—

 
$
—

 
$
9,187

 
$
9,187

Investment securities available-for-sale
870

 
1,530

 
278,618

 
281,018

CMBS - linked transactions
—

 
—

 
14,272

 
14,272

Derivatives (net)
—

 
21,618

 
—

 
21,618

Total assets at fair value
$
870

 
$
23,148

 
$
302,077

 
$
326,095

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Derivatives (net)
$
—

 
$
872

 
$
7,958

 
$
8,830

Total liabilities at fair value
$
—

 
$
872

 
$
7,958

 
$
8,830

 
 
 
 
 
 
 
 
As of 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

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
142

 
5,118

 
31

 
(2,454
)
 
2,837

Purchases
105,572

 
61,402

 
31,058

 
3,999

 
202,031

Sales
(99,151
)
 
(20,100
)
 
—

 
(2,050
)
 
(121,301
)
Paydowns
(36,768
)
 
(10,412
)
 
(825
)
 
—

 
(48,005
)
Included in OCI
9,009

 
9,091

 
897

 
(1,481
)
 
17,516

Transfers out of Level 2
—

 
—

 
—

 
—

 
—

Transfers into Level 3
—

 
—

 
—

 
—

 
—

Ending balance, September 30, 2014
$
189,589

 
$
71,755

 
$
31,612

 
$
9,121

 
$
302,077



RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

In accordance with FASB ASC Topic 820-10-50-2-bbb, RSO is not required to disclose quantitative information with respect to unobservable inputs contained in fair value measurements that are not developed by RSO. As such, RSO has not disclosed such information associated with fair values obtained from third-party pricing sources. Because 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. RSO reclassified $94.9 million of CMBS (including certain CMBS accounted for as linked transactions), 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
(2,233
)
Ending balance, September 30, 2014                                                                              
$
7,958

RSO had no losses included in earnings due to other-than-temporary impairment charges during the three and nine months ended September 30, 2014, respectively. RSO had $255,000 and $811,000 of losses included in earnings due to the other-than-temporary impairment charges during the three and nine months ended September 30, 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 and nine months ended September 30, 2014 was $807,000 and $1.2 million, respectively. For the three and nine months ended September 30, 2013, nonrecurring fair value losses for impaired loans was $69,000 and $3.1 million, respectively, and is included in the consolidated statements of operations as provision for loan and lease losses.
The following table summarizes the financial assets and liabilities measured at fair value on a nonrecurring basis and indicates the fair value hierarchy of the valuation techniques utilized by RSO to determine such fair value as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
As of September 30, 2014
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Loans held for sale
$
—

 
$
36,674

 
$
54,708

 
$
91,382

Impaired loans
—

 
893

 
—

 
893

Total assets at fair value
$
—

 
$
37,567

 
$
54,708

 
$
92,275

 
 
 
 
 
 
 
 
As of 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


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of September 30, 2014, the significant unobservable inputs used in the fair value measurements were as follows (in thousands):
 
Fair Value at
September 30, 2014
 
Valuation Technique
 
Significant
Unobservable Inputs
 
Significant
Unobservable
Input Value
Interest rate swap agreements
$
7,958

 
Discounted cash flow
 
Weighted average credit spreads
 
5.12
%
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 are primarily measured using a third-party pricing service.  The fair value of RSO’s Level 3 Loans held-for-investment are 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. Moselle CLO is valued using a third-party pricing specialist.
Junior subordinated notes are estimated by obtaining quoted prices for similar assets in active markets.
RSO elected the fair value option for Moselle CLO when it consolidated it in 2014. The fair value option was elected for this CLO due to the relative pricing visibility on both the underlying assets and the notes of the CLO. Additionally, RSO believes the fair value option also better reflects the nature and intent of the management's investment in this vehicle. RSO recorded a gain of $2.2 million and $3.5 million on the fair value of loans of Moselle CLO and a loss of $2.6 million and $3.0 million on the fair value of the notes of Moselle CLO as net realized and unrealized gain/(loss) on investment securities available-for-sale and loans for the three and nine months ended September 30, 2014 on the consolidated statement of income. The interest income recorded to interest income-loans on the consolidated income statement and the interest expense recorded to interest expense on the consolidated income statement were calculated at the coupon rate. At September 30, 2014 there were no significant gains or losses for the assets or liabilities due to credit risk.


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

The fair values of RSO’s remaining financial instruments that are not reported at fair value on its consolidated balance sheets are reported in the following table (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)
As of September 30, 2014
 
 
 
 
 
 
 
 
 
Loans held-for-investment (1)
$
1,744,899

 
$
1,730,763

 
$
—

 
$
632,815

 
$
1,097,948

Loans receivable-related party
$
4,172

 
$
4,172

 
$
—

 
$
—

 
$
4,172

CDO notes (2)
$
1,213,852

 
$
1,131,145

 
$
—

 
$
1,131,145

 
$
—

Junior subordinated notes
$
51,154

 
$
17,648

 
$
—

 
$
—

 
$
17,648

Repurchase agreements
$
185,062

 
$
185,062

 
$
—

 
$
—

 
$
185,062

Senior secured revolving credit agreement
$
32,911

 
$
32,911

 
$
—

 
$
—

 
$
32,911

 
 
 
 
 
 
 
 
 
 
As of 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

 
(1)
Contains loans for which the fair value method was elected with an unpaid principal balance of $89.2 million and a fair value of $83.0 million at September 30, 2014.
(2)
Contains notes for which the fair value method was elected with an unpaid principal balance of $95.0 million and a fair value of $92.5 million at September 30, 2014.

RAI - Other VIEs
In March 2014, the Company made a payment under a guarantee on behalf of a VIE that it does not consolidate. 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 the structured finance entities that hold investments in trust preferred assets (the “Trapeza entities”) and asset-backed securities (the "Ischus entities”), and RREGPS 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.  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 September 30, 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 September 30, 2014 (in thousands):
 
Receivables from
Managed Entities and Related
Parties, Net (1)
 
Investments
 
Maximum Exposure
to Loss in
Non-consolidated
VIEs
Ischus entities
$
158

 
$
—

 
$
158

Trapeza entities
—

 
661

 
661

RREGPS
—

 
716

 
716

 
$
158

 
$
1,377

 
$
1,535


RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
SEPTEMBER 30, 2014
(unaudited)

 
(1)
Exclusive of expense reimbursements due to the Company.
NOTE 20 - SUBSEQUENT EVENTS        
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 or disclosures in the consolidated financial statements, except the following:

On October 27, 2014, RSO called and liquidated Apidos CDO I.  Proceeds from the liquidation were used to pay the notes down in full.

On October 31, 2014, RSO agreed to a modification of the terms of its Wells CRE repurchase facility agreement.  The modification increases the facility maximum by $150.0 million from $250.0 million to $400.0 million and extends the facility's maturity date to August 27, 2016.  The modification has also increased the facility's maximum single asset concentration limit and reduced the minimum portfolio debt yield tests requirement.  The modification also reduced pricing spreads on select portfolio assets.  RSO paid a structuring fee of $1.6 million upon the closing of the modification.



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, or RSO, 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 September 30, 2014, we managed $19.4 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 properties. 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 March 2014, we launched Resource Real Estate Global Property Securities, or RREGPS, an Australian unregistered managed investment fund, structured as a unit trust, which we manage through a joint venture with an unrelated third-party. We invested $677,400 in RREGPS in March 2014.
In our financial fund management segment, we continue to focus primarily on the sponsorship and management of issuers of collateralized loan obligations, or CLOs, and the management of legacy collateralized debt obligations, or CDOs. Through our joint venture, CVC Credit Partners, we have closed 11 CLOs with a total par value of approximately $5.8 billion since the formation of the joint venture in 2012. In September 2013, CVC Credit Partners completed the public offering of Credit Partners European Opportunities Limited, or the European Opportunities Fund, 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 $559,000 and $3.3 million during the three and nine months ended September 30, 2014 on our receivables due from three of our commercial finance investment funds based on reductions in their projected cash flows, including a $210,000 write-down of our loan receivable from one of the funds in conjunction with our liquidating the fund in July 2014.
We recorded consolidated net income attributable to common shareholders of $1.5 million and $5.2 million for the three and nine months ended September 30, 2014, respectively.


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, expense reimbursements and dividends we receive and our risks associated with being an investor in RSO are limited to our ownership of 2.2% of RSO's common stock.
The operating results and the discussion 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 $2.8 billion to $19.4 billion at September 30, 2014 from $16.6 billion at September 30, 2013. The following table sets forth information relating to our assets under management by operating segment (in millions, except percentages) (1):
 
September 30,
 
Increase
 
2014
 
2013
 
Amount
 
Percentage
Financial fund management (2)
$
15,696

 
$
13,849

 
$
1,847

 
13%
Real estate (3)
3,056

 
2,141

 
915

 
43%
Commercial finance
646

 
580

 
66

 
11%
 
$
19,398

 
$
16,570

 
$
2,828

 
17%
 
 
 
 
 
 
 
 
Net assets under management (4)
$
9,191

 
$
7,420

 
$
1,771

 
24%
 
(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 $1.8 billion increase in assets managed by CVC Credit Partners and a $324 million increase in private equity and other assets offset, in part, by reductions in eligible collateral bases of our ABS ($106.4 million) and trust preferred portfolios ($117.1 million).
(3)
The increase is primarily due to the $573.0 million increase in assets managed for RRE Opportunity REIT I; the offering for this fund was closed in December 2013 and an increase of $274.0 million in commercial real estate assets managed for RSO.
(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; tenant-in-common, or 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 September 30, 2014 (1)
 
 
 
 
 
 
 
Financial fund management
46
 
8
 
—
 
11
Real estate
4
 
8
 
6
 
6
Commercial finance
—
 
3
 
—
 
2
 
50
 
19
 
6
 
19
As of September 30, 2013 (1)
 
 
 
 
 
 
 
Financial fund management
45
 
13
 
—
 
4
Real estate
2
 
9
 
6
 
5
Commercial finance
—
 
4
 
—
 
2
 
47
 
26
 
6
 
11
 
(1)
All of our operating segments manage assets on behalf of RSO.


As of September 30, 2014 and 2013, we managed assets in the following classes for the accounts of institutional and individual investors, RSO and for our own account (in millions):
 
September 30, 2014
 
September 30, 2013
 
Institutional and
Individual Investors
 
RSO
 
Company
 
Total
 
Total
Bank loans (1) 
$
9,738

 
$
1,384

 
$
—

 
$
11,122

 
$
9,284

Trust preferred securities (2) 
3,253

 
—

 
—

 
3,253

 
3,370

Asset-backed securities (2) 
912

 
—

 
—

 
912

 
1,018

Mortgage and other real
estate-related loans (3)
4

 
1,452

 
—

 
1,456

 
1,095

Real properties (3) 
1,562

 
—

 
16

 
1,578

 
1,046

Commercial finance assets (4) 
646

 
—

 
—

 
646

 
580

Private equity and other assets (2) 
84

 
347

 
—

 
431

 
177

 
$
16,199

 
$
3,183

 
$
16

 
$
19,398

 
$
16,570

 
 
 
 
 
 
 
 
 
 
Net assets under management (5)
$
7,207

 
$
1,968

 
$
16

 
$
9,191

 
$
7,420

 
(1)
We value these assets at their net outstanding collateral balance.
(2)
We value these assets at their amortized cost.
(3)
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.
(4)
We value our commercial finance assets as the sum of the book value of the financed equipment and leases and loans.
(5)
Net assets under management represents the proportionate share of assets we manage after reflecting joint venture arrangements.
Employees
As of September 30, 2014, we had 721 full-time employees, an increase of 86 (14%) from September 30, 2013. The following table summarizes our employees by operating segment:
 
Total
 
Real Estate
 
Financial Fund
Management
 
Corporate/
Other
September 30, 2014
 
 
 
 
 
 
 
Investment professionals
79
 
61
 
15
 
3
Other
95
 
35
 
11
 
49
 
174
 
96
 
26
 
52
Property management
547
 
547
 
—
 
—
Total
721
 
643
 
26
 
52
 
 
 
 
 
 
 
 
September 30, 2013
 
 
 
 
 
 
 
Investment professionals
63
 
49
 
11
 
3
Other
75
 
17
 
17
 
41
 
138
 
66
 
28
 
44
Property management
497
 
497
 
—
 
—
Total
635
 
563
 
28
 
44
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Fund management revenues (1) 
$
13,241

 
$
13,744

 
$
43,460

 
$
30,086

Finance and rental revenues (2) 
2,420

 
2,289

 
7,088

 
6,908

RSO management fees (3) 
3,309

 
4,756

 
9,106

 
9,891

(Losses) gains on resolution of loans (4) 
(10
)
 
9

 
(10
)
 
1,632

Other revenues
869

 
3,624

 
1,983

 
5,917

Subtotal - Resource America revenues before consolidating with RSO
19,829

 
24,422

 
61,627

 
54,434

Consolidated VIE-RSO revenues
34,716

 
23,786

 
100,604

 
76,011

Elimination of consolidated VIE-RSO revenues attributed to operating segments
(4,136
)
 
(5,183
)
 
(10,056
)
 
(10,608
)
 
$
50,409

 
$
43,025

 
$
152,175

 
$
119,837

 
(1)
Includes fees from our real estate and financial fund management segments and our share of the income or loss from limited and general partnership interests we own in our real estate, financial fund management and commercial finance operations.
(2)
Includes rental income and revenues from certain real estate assets.
(3)
Reflects the various management fees that are received by our operating segments acquiring, managing, and financing the assets of RSO. These fees are eliminated in reporting the consolidated results of Resource America including RSO.
(4)    Includes the resolution of loans we hold in our real estate segment.
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 sponsored real estate investment entities 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):
 
September 30,
 
2014
 
2013
Assets under management (1):
 
 
 
Commercial real estate debt for RSO
$
1,328

 
$
1,058

Real estate investment funds and programs
572

 
573

RRE Opportunity REIT I
963

 
390

RRE Opportunity REIT II
17

 
—

Distressed portfolios
—

 
38

Properties managed for RSO
35

 
50

Institutional portfolios
15

 
15

Residential mortgages for RSO
88

 
—

Legacy portfolio
16

 
16

RREGPS
5

 
—

DIF
17

 
1

 
$
3,056

 
$
2,141

 
 
 
 
Net assets under management
$
3,054

 
$
2,141



 
(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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Management fees:
 
 
 
 
 
 
 
REIT management fees from RSO
$
2,609

 
$
4,589

 
$
7,519

 
$
9,447

Property management fees
3,110

 
2,379

 
8,292

 
7,914

Asset management fees
2,690

 
1,866

 
7,067

 
4,073

Broker-dealer fees
280

 
2,116

 
336

 
4,807

 
8,689

 
10,950

 
23,214

 
26,241

Other:
 

 
 

 
 
 
 
Rental property income and revenues of consolidated VIEs (1)
1,280

 
1,205

 
3,797

 
3,672

Master lease revenues
1,119

 
1,084

 
3,270

 
3,236

Fee income from sponsorship of investment entities
3,299

 
2,725

 
11,410

 
4,996

(Losses) gains and fees on resolution of loans and other property interests
(10
)
 
9

 
(10
)
 
1,632

Equity in losses of unconsolidated entities
(88
)
 
(23
)
 
(669
)
 
(334
)
 
$
14,289

 
$
15,950

 
$
41,012

 
$
39,443

Costs and expenses:
 

 
 

 
 
 
 
General and administrative expenses
$
3,651

 
$
4,866

 
$
11,736

 
$
11,459

Property management expenses
2,218

 
2,443

 
6,608

 
6,992

Broker-dealer expenses
1,381

 
1,966

 
3,013

 
4,550

Master lease expenses
1,265

 
1,038

 
3,484

 
4,004

Rental property expenses and expenses of consolidated VIEs (1)
869

 
865

 
2,523

 
2,509

 
$
9,384

 
$
11,178

 
$
27,364

 
$
29,514

 
(1)
We generally consolidate a VIE when we are deemed to be the primary beneficiary of the entity.
Revenues − Three Months Ended September 30, 2014 as Compared to the Three Months Ended September 30, 2013
Revenues from our real estate operations decreased $1.7 million (10%) to $14.3 million for the three months ending September 30, 2014 from $16.0 million for the three months ended September 30, 2013.  We attribute these changes primarily to the following:
Management fees
•
a $2.0 million decrease in REIT management fees from RSO, which can vary from quarter to quarter depending on the results of RSO.
•
a $731,000 increase in property management fees, corresponding to the increase in the number of properties under management by 10 to 75 at September 30, 2014 from 65 at September 30, 2013.
•
a $1.8 million decrease in broker-dealer manager fees. The three months ended September 30, 2013 reflects fees earned related to the RRE Opportunity REIT I offering, which closed in December 2013, as compared to the fees earned in 2014 in connection with the offering of RRE Opportunity REIT II which broke escrow in June 2014; and


•
an $824,000 increase in asset management fees, principally due to a $1.3 million increase in the fees earned from RRE Opportunity REIT I as a result of an increase in its assets under management net of a $139,000 decrease in fees due to sale of assets we managed on behalf of RSO.
Other revenues
•
a $574,000 increase in fee income in connection with the purchase and third-party financing of properties through RRE Opportunity REIT I, as follows:
•
During the three months ended September 30, 2014, we earned $3.3 million in fees, respectively, primarily from the following activities:
•
acquired two properties valued at $98.5 million;
•
purchased the minority interests in three properties for $1.1 million;
•
sold two properties valued at $36.1 million; and
•
placed financing on properties totaling $57.5 million.
•
In comparison, during the three months ended September 30, 2013, we earned $2.7 million in fees primarily from the following:
•
acquired four properties valued at $105.3 million;
•
sold two properties valued at $19.8 million; and
•
refinanced one property for $8.2 million.
Costs and Expenses - Three Months Ended September 30, 2014 as Compared to the Three Months Ended September 30, 2013
Costs and expenses of our real estate operations decreased $1.7 million (16%) for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. We attribute this primarily to the following:
•
a $1.2 million decrease in general and administrative expenses, principally a $955,000 decrease in wages and benefits, reflecting the incentive bonus that was paid in 2013 in conjunction with the sale of a property;
•
a $227,000 decrease in the consolidated expenses of a property in which we hold a master lease; and
•
a $585,000 decrease in broker-dealer expenses. During the three months ended September 30, 2014, we incurred commission costs of $104,000 in conjunction with the offering of RRE Opportunity REIT II as compared to $987,000 of costs incurred for the RRE Opportunity REIT I offering.
Revenues - Nine Months Ended September 30, 2014 as Compared to the Nine Months Ended September 30, 2013
Revenues from our real estate operations increased $1.6 million (2%) to $41.0 million for the nine months ended September 30, 2014, from $39.4 million for the nine months ended September 30, 2013.  We attribute these changes primarily to the following:
Other revenues
•
a $6.4 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 nine months ended September 30, 2014, we earned $11.4 million in fees, primarily from the following activities:
•
acquired eight properties valued at $302.4 million, and member interests in a pool of 10 properties for $59.5 million;
•
sold six properties valued at $143.0 million; and
•
placed a total of $297.9 million in financings on properties.


•
In comparison, during the nine months ended September 30, 2013, we earned $5.0 million in fees primarily from the following activities:
•
acquired nine properties valued at $169.7 million;
•
sold four properties valued at $43.1 million; and
•
refinanced one property for $8.2 million.
•
a $1.6 million decline in gains and fees on the resolution of property interests. During the nine months ended September 30, 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 during the nine months ended September 30, 2014.
Management fees
•
a $2.1 million increase in asset management fees, principally due to a $3.4 million increase in the fees earned from RRE Opportunity REIT I as a result of the increase in its assets offset, in part by, a $380,000 decrease in fees related to assets sold by an RSO joint venture.
The increase in management fees was more than offset by the following:
•
a $1.9 million decrease in REIT management fees from RSO, which can vary from quarter to quarter depending on the results of RSO; and
•
a $4.5 million decrease in broker-dealer fees. During the nine months ended September 30, 2013, we earned broker-dealer fees in connection with the RRE Opportunity REIT I offering, which closed in December 2013, as compared to the RRE Opportunity REIT II offering, which broke escrow in June 2014.
Costs and Expenses − Nine Months Ended September 30, 2014 as Compared to the Nine Months Ended September 30, 2013
Costs and expenses of our real estate operations decreased $2.2 million (7.3%) for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. We attribute these changes primarily to the following:
•
a $277,000 decrease in general and administrative expenses, which reflects a $330,000 decrease in wages and benefits principally in conjunction with the increase in allocations to RRE Opportunity REIT I and II reflecting the additional resources applied to those entities as their assets under management increase;
•
a $520,000 decrease in expenses for our master lease which are consolidated expenses of a property in which we hold a master lease; and
•
a $1.5 million decrease in broker-dealer expenses. During the nine months ended September 30, 2013, we incurred commission costs of $2.0 million in conjunction with the RRE Opportunity REIT I offering as compared to $120,000 incurred in 2014 in conjunction with the RRE Opportunity REIT II offering.

Results of Operations:  Financial Fund Management
General. We conduct our financial fund management operations primarily through seven separate operating entities:
•
CVC Credit Partners, or CCP, a global joint venture between us and an unrelated third-party, finances, structures and manages investments in bank loans, high yield bonds and equity securities 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; and
•
Northport Capital, LLC, or Northport, a newly-formed wholly-owned subsidiary of Resource America, provides middle market loan management and monitoring 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
September 30, 2014
 
 
 
 
 
CVC Credit Partners
$
9,738

 
$
1,384

 
$
11,122

Trapeza
3,253

 
—

 
3,253

Ischus
912

 
—

 
912

Other
62

 
347

 
409

 
$
13,965

 
$
1,731

 
$
15,696

 
 
 
 
 
 
Net assets under management
$
5,621

 
$
517

 
$
6,138

 
 
 
 
 
 
September 30, 2013
 

 
 

 
 

CVC Credit Partners
$
7,075

 
$
2,209

 
$
9,284

Trapeza
3,370

 
—

 
3,370

Ischus
1,018

 
—

 
1,018

Other company-sponsored partnerships
158

 
19

 
177

 
$
11,621

 
$
2,228

 
$
13,849

 
 
 
 
 
 
Net assets under management
$
4,893

 
$
387

 
$
5,280

 
(1)
For information on how we calculate assets under management and net assets under management, see "Assets Under Management" above.
CVC Credit Partners
We and our joint venture partner have, through CCP, sponsored, structured and/or currently manage 24 CLO issuers and nine separately managed accounts for institutional and individual investors as well as for RSO, holding approximately $11.1 billion in U.S. and European bank loans and corporate bonds at September 30, 2014, of which $1.4 billion are managed on behalf of RSO.
For the CLOs managed, CCP earns average fees of 0.14% (senior) and 0.28% (subordinate) of the aggregate principal balance of the 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 the debt. For separately managed accounts, CCP earns approximately 0.83% on the average balance of assets managed.
During the three and nine months ended September 30, 2014, we received 75% of the incentive management fees generated by seven legacy Apidos CLOs.
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 September 30, 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 own a 50% interest in the general partner of one affiliated limited partnership, which is in the process of liquidation. Four former limited partnerships and related general partners have been liquidated during 2014.
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 $912.0 million in real estate ABS, including RMBS, CMBS and credit default swaps at September 30, 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.
Other
Through RFIG, we sponsored, structured and currently manage seven affiliated partnerships for individual and institutional investors, which hold approximately $62.0 million of investments in financial institutions at September 30, 2014. We derive revenues from these operations through annual management fees, based on an average of 1.85% of equity. In addition, we may receive a carried interest of up to 20% upon meeting specific investor return rates. As part of our sponsorship, management and general partnership interests, we hold limited partnership interests in five of these partnerships.
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.
Through our Northport group, in connection with RSO's middle market lending business, we can earn loan origination fees of up to 2% which are paid by the borrower on certain RSO middle market loans.         
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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Fund management fees
$
821

 
$
871

 
$
2,895

 
$
2,315

Fund management fees - incentive
941

 
541

 
5,798

 
1,655

RSO management fees - trading portfolio
—

 
30

 
—

 
(10
)
RSO management fees
700

 
139

 
1,587

 
431

Structuring and placement fees
215

 
2,013

 
3,582

 
2,013

Loan origination fees
354

 
—

 
1,277

 
—

Introductory agent fees
439

 
333

 
1,132

 
826

Equity in earnings of unconsolidated CDO issuers
258

 
220

 
719

 
660

Equity in earnings of CVC Credit Partners
586

 
593

 
1,227

 
698

Gains, net, on trading securities
855

 
3,472

 
1,910

 
5,714

Other revenues
15

 
81

 
74

 
132

 
5,184

 
8,293

 
20,201

 
14,434

Total limited and general partner interests
373

 
209

 
572

 
800

 
$
5,557

 
$
8,502

 
$
20,773

 
$
15,234

Costs and expenses:
 

 
 

 
 
 
 
General and administrative expenses
$
2,812

 
$
3,547

 
$
9,980

 
$
7,769

Revenues − Three Months Ended September 30, 2014 as Compared to the Three Months Ended September 30, 2013
Revenues decreased $2.9 million (35%) to $5.6 million for the three months ended September 30, 2014 from $8.5 million for three months ended September 30, 2013. We attribute the decrease to the following:
•
a $50,000 decrease in fund management fees, primarily due to the collection of a deferred subordinated collateral management fee from our Trapeza operations in the three months ended September 30, 2013 that did not recur in 2014;
•
a $1.8 million decrease in structuring and placement fees, principally due to fees earned by Resource Capital Markets for underwriting a European CLO, during the three months ended September 30, 2013, for an unrelated third-party collateral manager. There was no such fee earned during the three months ended September 30, 2014.


•
a $2.6 million decrease in realized and unrealized gains and interest recorded on our trading securities portfolio, which can vary significantly by quarter.
These decreases were partially offset by the following increases:
•
a $400,000 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 $561,000 increase in RSO management fees, due to the allocation of fees to Northport for their management of middle market assets on behalf of RSO;
•
$354,000 of loan origination fees earned by Northport as a result of middle market loans issued by RSO;
•
a $106,000 increase in introductory agent fees earned in connection with six structured security transactions with an average fee of $73,100 as compared to ten structured security transaction with an average fee of $33,000 for the prior year period; and
•
a $164,000 increase in fair value adjustments recorded for our limited partner general partner and members interests in unconsolidated partnerships, including gains of $149,000 on Pelium Capital LP, a newly sponsored credit opportunities fund and $240,000 on RCM Global LLC, a newly formed venture between the us, RSO and certain related parties.
Costs and Expenses − Three Months Ended September 30, 2014 as Compared to Three Months Ended September 30, 2013
    Costs and expenses of our financial fund management operations decreased $735,000 (21%) to $2.8 million for the three months ended September 30, 2014 from $3.5 million for the three months ended September 30, 2013. We attribute this decrease to a decrease in incentive compensation in connection with the September 2013 structuring and placement fees earned.
Revenues − Nine Months Ended September 30, 2014 as Compared to the Nine Months Ended September 30, 2013
Revenues increased $5.5 million (36%) to $20.8 million for the nine months ended September 30, 2014 from $15.2 million in the nine months ended September 30, 2013. We attribute the increase primarily to the following:
•
a $580,000 increase in fund management fees, primarily due to the collection of a deferred subordinated collateral management fee from our Trapeza operations and increased capital bases in our unconsolidated company sponsored partnerships as a result of fair value adjustments;
•
a $4.1 million 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 $1.2 million increase in RSO management fees, due to the allocation of fees earned by Northport for their management of middle market assets on behalf of RSO;
•
a $1.6 million increase in structuring and placement fees related to underwriting European CLOs for an unrelated third-party collateral manager. During the nine months ended September 30, 2014 and 2013, Resource Capital Markets earned fees of $3.6 million and $2.0 million, respectively;
•
$1.3 million of loan origination fees earned by Northport as a result of middle market loans issued by RSO;
•
a $306,000 increase in introductory agent fees as a result of fees earned in connection with 20 structured security transactions with an average fee of $57,000 as compared to 29 structured security transactions with an average fee of $28,000 for the prior year period; and
•
a $529,000 increase in equity in earnings of CCP, due primarily to the 2013 up-front transaction costs associated with the public offering of CVC Credit Partners European Opportunities Limited, a European publicly listed investment vehicle, which closed in June 2013.
These increases were partially offset by the following decreases, which can vary significantly by quarter:
•
a $3.8 million decrease in realized and unrealized gains and interest recorded on our trading securities portfolio; and
•
a $228,000 decrease in fair value adjustments recorded for our limited and general partner interests in unconsolidated company-sponsored partnerships.
Costs and Expenses − Nine Months Ended September 30, 2014 as Compared to Nine Months Ended September 30, 2013
    Costs and expenses of our financial fund management operations increased $2.2 million (28%) to $10.0 million and for the three months ended September 30, 2014 from $7.8 million in the nine months ended September 30, 2013, primarily as a result of the increased number of employees.



Results of Operations:  Commercial Finance
The commercial finance assets we manage through LEAF Commercial Capital Inc., or LEAF, increased by $65.0 million to $645 million as compared to $580.0 million at September 30, 2013. This increase reflects a $83.0 million increase in the LEAF portfolio, offset in part by a $18.0 million decrease in the assets managed by our four investment partnerships, reflecting the natural runoff of those portfolios. As of September 30, 2014, LEAF managed 61,355 leases and loans for itself and our investment entities, with an average original finance value of $21,300 and an average term of 54 months. As of September 30, 2013, LEAF managed approximately 55,000 leases and loans for itself and our investment entities, with an average original finance value of $24,000, and an average term of 57 months.    
The following table sets forth information related to commercial finance assets managed by us and LEAF, our unconsolidated joint venture (1) (in millions):
 
September 30,
 
2014
 
2013
LEAF
$
586

 
$
503

Commercial finance investment partnerships
59

 
77

 
$
645

 
$
580


(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):    
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
  Equity in losses of investment entities
$
(100
)
 
$
(28
)
 
$
(237
)
 
$
(233
)
  Equity in losses of LEAF
83

 
(2
)
 
79

 
(10
)
 
$
(17
)
 
$
(30
)
 
$
(158
)
 
$
(243
)
Costs and expenses:
 

 
 

 
 
 
 
General and administrative expenses - wage and benefit costs
$
89

 
$
57

 
$
276

 
$
160

General and administrative expenses - other
36

 
18

 
75

 
(259
)
 
$
125

 
$
75

 
$
351

 
$
(99
)
During 2012, our share of LEAF's losses reduced our investment to zero and, as a result, since then we have not reflected losses of LEAF in our consolidated financial statements. 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 $105,000 and $605,000 of fund management fees from these entities during the three and nine months ended September 30, 2014 and $410,000 and $1.5 million during the three and nine months ended September 30, 2013, respectively.
Results of Operations:  Other Costs and Expenses
General and Administrative Expenses
General and administrative costs were $2.4 million and $8.3 million for the three and nine months ended September 30, 2014, respectively, a decrease of $79,000 (3%) and an increase of $1.5 million (22%) as compared to $2.5 million and $6.8 million for the three and nine months ended September 30, 2013, respectively. Wages and benefits increased relative to our increased assets managed by $25,000 and $826,000 for the three and nine months ended September 30, 2014, respectively, including an additional $185,000 and $458,000, respectively, of expense related to stock-based compensation awards. For the nine months ended September 30, 2014, professional fees increased by $881,000 primarily due to the additional audit and legal fees incurred relative to the change in our reporting year end as well as the consolidation of RSO.


Other-Than-Temporary Impairment Losses
There were no other-than-temporary impairment losses recorded during the three and nine months ended September 30, 2014. During the nine months ended September 30, 2013, we recorded $214,000 of impairment losses on certain of our investments in CLOs, primarily those with investments 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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Commercial finance:
 
 
 
 
 
 
 
Receivables from managed entities
$
582

 
$
1,797

 
$
3,381

 
$
6,142

Leases and loans and future payment card receivables
(24
)
 
(18
)
 
(37
)
 
(25
)
Real estate:
 

 
 

 
 
 
 
Receivables from managed entities
(1
)
 
13

 
1

 
(2,524
)
Rent receivables
2

 
16

 
(3
)
 
1

Financial fund management:
 
 
 
 
 
 
 
Receivables from managed entities
—

 
—

 
—

 
199

 
$
559

 
$
1,808

 
$
3,342

 
$
3,793

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 $0.6 million and $3.3 million for the three and nine months ended September 30, 2014, respectively, and $1.8 million and $6.1 million for the three and nine months ended September 30, 2013, respectively.
During the nine months ended September 30, 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 previously recorded provisions.
Depreciation and Amortization
The following table reflects the depreciation reported by our operating segments (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Real estate property investments
$
136

 
$
150

 
$
398

 
$
571

Other operating segments - primarily depreciation on fixed assets
317

 
263

 
971

 
747

Total depreciation expense
$
453

 
$
413

 
$
1,369

 
$
1,318

Interest Expense
Interest expense includes the non-cash amortization of debt issuance costs. During the three and nine months ended September 30, 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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Corporate
$
275

 
$
315

 
$
859

 
$
905

Real estate
190

 
209

 
577

 
613

Financial fund management
—

 
7

 
—

 
7

Commercial finance
2

 
(1
)
 
11

 
—

 
$
467

 
$
530

 
$
1,447

 
$
1,525

Net (Income) Loss Attributable to Noncontrolling Interests
We record third-party interests in our earnings as amounts allocable to noncontrolling interests.  The following table sets forth the net (income) loss attributable to noncontrolling interests (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Noncontrolling interests in consolidated VIE-RSO (1)
$
(14,214
)
 
$
(23,708
)
 
$
(48,759
)
 
$
(44,394
)
Other:
 
 
 
 
 
 
 
  Real estate - hotel property (2) 
$
1

 
$
(40
)
 
$
(61
)
 
$
(23
)
  Real estate - Australian joint venture (3)
10

 
—

 
28

 
—

 
$
11

 
$
(40
)
 
$
(33
)
 
$
(23
)
 
(1)
Our rights and benefits with respect to RSO are limited to the management compensation, expense reimbursements and dividends 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 us and RSO (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
RAI
$
1,741

 
$
1,261

 
$
4,991

 
$
(396
)
RSO
(237
)
 
722

 
(667
)
 
4,221

Total
$
1,504

 
$
1,983

 
$
4,324

 
$
3,825

The following paragraphs discuss our income taxes, 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 40% and 42% for the three and nine months ended September 30, 2014, respectively, as compared to a provision of 25% and benefit of 7% benefit for the three and nine months ended September 30, 2013, respectively. The change in the income tax rate primarily relates to additional tax benefits recorded for the three and nine months ended September 30, 2013 which are not applicable for the three and nine months ended September 30, 2014. Our effective income tax rate without discrete tax items would have been 43% and 38% for the three and nine months ended September 30, 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 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 for years before 2007.


               
                The New York State 2014-2015 Budget Act (“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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Total interest income
$
33,841

 
$
28,464

 
$
91,518

 
$
92,499

Interest expense
11,589

 
11,762

 
31,836

 
34,061

Net interest income
22,252

 
16,702

 
59,682

 
58,438

Other revenues
12,464

 
7,084

 
40,922

 
17,573

Total revenues
34,716

 
23,786

 
100,604

 
76,011

Operating expenses
18,449

 
16,276

 
50,353

 
47,331

Net operating income
16,267

 
7,510

 
50,251

 
28,680

Other revenues, net
(1,936
)
 
16,607

 
(758
)
 
16,607

Net income
$
14,331

 
$
24,117

 
$
49,493

 
$
45,287

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 September 30, 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 to, 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 September 30, 2014, our liquidity consisted of four primary sources:
•
cash on hand of $26.4 million;
•
$14.0 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 September 30, 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 September 30, 2014, our total borrowings outstanding of $20.5 million included $10.0 million of Senior Notes, $10.1 million of mortgage debt (secured by the underlying property) and $311,000 of other debt.
Capital Requirements
Our capital needs consist principally of available funding 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 dividend payments during the quarter ended June 30, 2013 as cash flows from operations were insufficient.
For the nine months ended September 30, 2014 and 2013, we paid cash dividends of $3.0 million and $1.2 million, 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 on or recourse with respect to any of its liabilities or borrowings.
The following tables summarize our contractual obligations and other commercial commitments at September 30, 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)
$
10,141

 
$
209

 
$
457

 
$
521

 
$
8,954

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

 
—

 
—

 
10,000

 
—

Capital lease obligations (1) 
310

 
223

 
87

 


 
—

 
10,310

 
223

 
87

 
10,000

 
—

 
 
 
 
 
 
 
 
 
 
Operating lease obligations
14,298

 
2,222

 
4,360

 
3,926

 
3,790

Other long-term liabilities
6,237

 
809

 
1,534

 
1,349

 
2,545

Total contractual obligations
$
40,986

 
$
3,463

 
$
6,438

 
$
15,796

 
$
15,289

 
(1)
Not included in the table above are estimated interest payments calculated at rates in effect at September 30, 2014 - less than 1 year: $1.6 million; 1-3 years:  $2.2 million; 3-5 years:  $1.6 million; and after 5 years: $1.0 million.
 
 
 
Amount of Commitment Expiration Per Period
 
Total
 
Less than
1 Year
 
1 – 3
Years
 
3 – 5
Years
 
After
5 Years
Other commercial commitments:
 
 
 
 
 
 
 
 
 
Standby letters of credit
$
803

 
$
803

 
$
—

 
$
—

 
$
—

Total commercial commitments
$
803

 
$
803

 
$
—

 
$
—

 
$
—



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 $100,000 and $221,000 as of September 30, 2014 and December 31, 2013, respectively.  As of September 30, 2014 and December 31, 2013, Resource Securities net capital was $551,000 and $2.7 million, respectively, which exceeded the minimum requirements by $451,000 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.
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 September 30, 2014, except for the executive compensation, we do not believe it is probable that any payments will be required under any of our commitments and contingencies, and accordingly, no liabilities for these obligations have been recorded in the consolidated financial statements.
Variable Interest Entities
In general, a VIE is an entity that does not have sufficient equity to finance its operations without additional subordinated financial support, or an entity for which the risks and rewards of ownership are not directly linked to voting interests. We have variable interests in VIEs through our management contracts and investments in various securitization entities, including CDO issuers. Since we serve as the asset manager for the investment entities we sponsored and manage, we are generally deemed to have the power to direct the activities of the VIE that most significantly impact the entity's economic performance. In the case of an interest in a VIE managed by us, we will perform an additional qualitative analysis to determine if our interest (including any investment as well as any management fees that qualify as variable interests) could absorb losses or receive benefits that could potentially be significant to the VIE. This analysis considers the most optimistic and pessimistic scenarios of potential economic results that could reasonably be experienced by the VIE. Then, we compare the benefits we would receive (in the optimistic scenario) or the losses we would absorb (in the pessimistic scenario) as compared to benefits and losses absorbed by the VIE in total. If the benefits or losses absorbed by us were significant as compared to total benefits and losses absorbed by all variable interest holders, then we would conclude that we are the primary beneficiary.
The financial statements for the three and nine months ended September 30, 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 investments in the Trapeza structured finance entities that hold investments in trust preferred assets and asset-backed securities (which we refer to as our Trapeza entities) and asset-backed securities (which we refer to as our Ischus entities), and RREGPS 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.  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 September 30, 2014.
Critical Accounting Policies
     The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues, costs and expenses, and related disclosure of contingent assets and liabilities. We make estimates of our allowance for credit losses, the valuation allowance against our deferred tax assets, discounts and collectability of management fees, the valuation of stock-based compensation, and in determining whether a decrease in the fair value of an investment is an other-than-temporary impairment. The financial fund management segment makes assumptions in determining the fair value of our investments in securities. 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 September 30, 2014, we had two secured revolving credit facilities for general business use. We only utilized one facility during 2014 for a short-term period. 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 September 30, 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 September 30, 2014, our trading security portfolio was comprised of $1.0 million of investments in equity and debt securities. Trading securities are recorded at fair value and changes in the fair value are included in operations. Assuming an immediate 10% decrease in the market value of these investments as of September 30, 2014, the hypothetical loss would have been approximately $102,000.
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, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
During the three months ended September 30, 2014, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




PART II. OTHER INFORMATION

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information about purchases by us during the quarter ended September 30, 2014 of equity securities that are registered under Section 12 of the Securities Exchange Act of 1934:

Issuer Purchases of Equity Securities
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share (1)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs
July 2014
 
136,968

 
$
9.44

 
136,968

 
629,141

August 2014
 
419,277

 
$
9.40

 
419,277

 
209,864

September 2014
 
109,688

 
$
9.47

 
109,688

 
100,176

 
 
665,933

 

 
 
 
 
 
(1)
The average price per share as reflected above includes broker fees and commissions.
On December 18, 2013, our Board of Directors authorized a new stock repurchase program for the repurchase up to 1,000,000 shares of our common stock, representing approximately 5% of the shares outstanding. This repurchase authorization replaced the previous program. Share repurchases may be made from time to time through open market purchases or privately negotiated transactions at our discretion and in accordance with the rules of the Securities and Exchange Commission, as applicable. The amount and timing of any repurchases will depend on market conditions and other factors.



ITEM 6.    EXHIBITS    
Exhibit No.
 
Description
3.1
 
Restated Certificate of Incorporation of Resource America. (1)
3.2
 
Amended and Restated Bylaws of Resource America. (1)
4.1
 
Form of Warrant. (2)
4.2
 
Form of 9% Senior Note due 2015. (10)
4.3
 
Form of 9% Senior Note due 2018. (22)
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. (15)
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. (15)
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. (16)
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. (16)
10.9
 
Settlement Agreement, dated January 9, 2012, by and among Raging Capital Group and Resource America, Inc. (8)
10.10
 
Resource America, Inc. Investment Savings Plan. (17)
10.11
 
Resource America, Inc. 2012 Non-Employee Director Deferred Stock Plan. (18)
10.12(a)
 
Resource America, Inc. Amended and Restated Omnibus Equity Compensation Plan. (19)
10.12(b)
 
Form of Grant of Incentive Stock Option. (20)
10.12(c)
 
Form of Grant of Non-Qualified Incentive Stock Option. (20)
10.12(d)
 
Form of Stock Award Agreement. (21)


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 16, 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 12, 2012 and by this reference incorporated herein.
(9)
Filed previously as an exhibit to our Current Report on Form 8-K filed on January 18, 2012 and by this reference incorporated herein.
(10)
Filed previously as an exhibit to our Current Report on Form 8-K filed on December 18, 2012 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.
(17)
Filed previously as an exhibit to our Registration Statement on Form S-8 filed on April 13, 2009 and by this reference incorporated herein.
(18)
Filed previously as an exhibit to our Proxy Statement filed on January 30, 2012 and by this reference incorporated herein.
(19)
Filed previously as an exhibit to our Proxy Statement filed on April 16, 2014 and by this reference incorporated herein.
(20)
Filed previously as an exhibit to our Annual report on Form 10-K/A filed on March 27, 2006 and by this reference incorporated herein.
(21)
Filed previously as an exhibit to our Current Report on Form 8-K filed on February 15, 2006 and by this reference incorporated herein.
(22)
Filed previously as an exhibit to our Current Report on Form 8-K filed on September 2, 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)
 
 
 
November 10, 2014
By:
/s/ Thomas C. Elliott
 
 
THOMAS C. ELLIOTT
 
 
Senior Vice President and Chief Financial Office
 
 
 
November 10, 2014
By:
/s/ Arthur J. Miller
 
 
ARTHUR J. MILLER
 
 
Vice President and Chief Accounting Officer