4. Variable Interest Entity - FAR

In consideration for BB&T assuming the Company’s $285.4 million in principal amount of TruPS, BB&T received from the Company at the closing of the BB&T Transaction a 95% preferred membership interest in the net cash flows of FAR until such time as it has recovered $285 million in preference amount plus a priority return of LIBOR + 200 basis points per annum. At that time, BB&T’s interest in FAR will terminate, and the Company, which initially holds a 5% preferred membership interest in the net cash flows of FAR, will thereafter be entitled to any and all residual proceeds. The Company provided BB&T with an incremental $35 million guarantee to further assure BB&T’s recovery of the $285 million preference amount within seven years. At June 30, 2013, BB&T’s preferred interest in FAR has been reduced to approximately $154.5 million. In August 2013, FAR received full payment on a $19.7 million commercial real estate loan which, upon declaration of a dividend by the FAR Board of Managers, will further reduce BB&T’s preferred membership interest in FAR.

The Company’s variable interests in FAR include its 5% preferred membership interest in the cash flows of FAR, rights to all residual cash flows after satisfaction of the preferred membership interests, and the incremental $35 million guarantee in favor of BB&T. The Company also services approximately $20 million of FAR commercial loans, $12.7 million of FAR’s properties and equipment and $7.2 million of FAR’s real estate owned. The Company has a right of first refusal to acquire certain FAR commercial loans. It can also purchase certain commercial loans on a basis established in FAR’s operating agreement.

The Company analyzed FAR’s amended and restated limited liability agreement and determined that it was the primary beneficiary and therefore should consolidate FAR in its financial statements. This conclusion was based primarily on the determination that the Company has the right to receive any appreciation of the assets of FAR through its rights to the residual cash flows of FAR and has the obligation to absorb losses as well as its obligation under the incremental $35 million guarantee to BB&T assuring the repayment of BB&T’s preferred interest in FAR. Also contributing to the Company’s determination that it was the primary beneficiary of FAR was its ability to direct the activities relating to the commercial loans that it services, its ability to purchase certain commercial loans, and its right of first refusal in connection with the disposition of certain commercial loans.

BB&T’s preferred equity interest in FAR only entitles it to a $285 million preference amount plus the related priority return. Based on the amended and restated limited liability company agreement, FAR is required to make quarterly distributions, or more frequently as approved by FAR’s Board of Managers, of excess cash flows from its operations and the orderly disposition of its assets to redeem the preferred membership interests in FAR. As such, the Class A units, which represent the preferred interest in FAR, are considered mandatorily redeemable and are reflected as debt obligations in the Company’s Consolidated Statement of Financial Condition and the priority return is considered interest expense in the Company’s Consolidated Statements of Operations.

The activities of FAR are governed by the amended and restated limited liability company agreement which grants the Board of Managers management authority over FAR. The Board has four members, two members elected by the Company and two members elected by BB&T. Any action on matters before the Board requires three of the members’ approval. BB&T members will resign from the Board upon the redemption of its preferred interest in FAR.

The carrying amount of the assets and liabilities of FAR and the classification of these assets and liabilities in the Company’s Consolidated Statements of Financial Condition was as follows (in thousands):



		June 30,	December 31,
		2013	2012
Cash and interest bearing deposits in banks	$	6,817	6,615
Tax certificates held for sale		494	-
Tax certificates, net		892	3,389
Loans held for sale		15,965	20,052
Loans receivable, net		179,726	242,506
Real estate owned		25,821	21,997
Office properties and equipment		12,726	-
Other assets		925	1,649
Total assets	$	243,366	296,208
BB&T preferred interest in FAR, LLC	$	154,478	196,877
Other liabilities		13,418	13,603
Total liabilities	$	167,896	210,480

Until BB&T’s preference amount is repaid, the proceeds from the monetization of FAR’s assets are restricted to payments of expenses, including the priority return and estimated working capital requirements of FAR, and the repayment of FAR’s preferred membership interests. FAR currently anticipates making distributions at least quarterly. The Company will receive 5% of such distributions from the monetization of FAR’s assets, net of expenses. FAR finances its activities through revenues from principal and interest payments received on, and the monetization of, its assets.

The Company’s maximum loss exposure in FAR if all of FAR’s assets were deemed worthless would have been $111 million as of June 30, 2013, consisting of $76 million of net assets plus the $35 million incremental guarantee.