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 June 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 August 1, 2014 was 20,353,323 shares.


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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:
 
 
 





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PART I

ITEM 1.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
RESOURCE AMERICA, INC
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
June 30,
2014
 
December 31,
2013
 
(unaudited)
 
 
ASSETS
 
 
 
Cash
$
11,858

 
$
19,853

Restricted cash
654

 
571

Receivables
3,400

 
541

Loans and receivables from managed entities and related parties, net
32,586

 
30,923

Investments in real estate, net
17,084

 
17,696

Investment securities, at fair value
12,590

 
7,839

Investments in unconsolidated loan manager (see Note 8)
38,461

 
37,821

Investments in unconsolidated entities
13,448

 
14,342

Assets of consolidated variable interest entity ("VIE") - RSO (see Note 19):
 
 
 
     Cash and cash equivalents (including restricted cash)
313,528

 
325,579

     Investments, at fair value
273,454

 
226,764

     Loans
1,785,135

 
1,397,458

     Investments in real estate and unconsolidated entities
89,989

 
124,193

Other assets
96,062

 
76,467

Total assets of consolidated VIE - RSO
2,558,168

 
2,150,461

 
 
 
 
Property and equipment, net
5,378

 
5,844

Deferred tax assets, net
24,607

 
27,769

Other assets
5,212

 
4,791

Total assets
$
2,723,446

 
$
2,318,451

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Accrued expenses and other liabilities
$
16,846

 
$
22,134

Payables to managed entities and related parties
3,608

 
3,110

Borrowings
20,558

 
20,619

Liabilities of consolidated VIE - RSO (see Note 19):
 
 
 
     Borrowings
1,579,985

 
1,320,015

     Other liabilities
54,342

 
55,247

Total liabilities of consolidated VIE - RSO
1,634,327

 
1,375,262

Total liabilities
1,675,339

 
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;
31,111,667 and 30,378,339 shares issued (including nonvested restricted stock of 674,701 and 400,194), respectively
304

 
299

Additional paid-in capital
290,947

 
288,555

Accumulated deficit
(24,290
)
 
(26,025
)
Treasury stock, at cost; 10,667,202 and 10,434,436 shares, respectively
(109,906
)
 
(107,874
)
Accumulated other comprehensive loss
(1,257
)
 
(1,231
)
Total stockholders’ equity
155,798

 
153,724

Noncontrolling interests
306

 
238

Noncontrolling interests attributable to RSO
892,003

 
743,364

Total equity
1,048,107

 
897,326

 
$
2,723,446

 
$
2,318,451


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4
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RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
REVENUES:
 
 
 
 
 
 
 
Real estate (includes revenues of $2,302, $2,805, $4,985 and $5,093 related to RSO)
$
13,448

 
$
12,153

 
$
26,723

 
$
23,493

Financial fund management (includes revenues of $753, $(111), $960 and $270 related to RSO)
8,141

 
2,445

 
15,216

 
6,732

Commercial finance (includes no revenue related to RSO)
(42
)
 
(35
)
 
(141
)
 
(213
)
 
21,547

 
14,563

 
41,798

 
30,012

Revenues from consolidated VIE - RSO (see Note 19)
34,608

 
21,647

 
66,539

 
52,225

Elimination of consolidated VIE revenues attributed to operating segments
(3,040
)
 
(2,725
)
 
(5,920
)
 
(5,425
)
Total revenues
53,115

 
33,485

 
102,417

 
76,812

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Real estate
9,105

 
8,896

 
17,980

 
18,336

Financial fund management
2,779

 
1,694

 
7,168

 
4,222

Commercial finance
123

 
(219
)
 
226

 
(174
)
General and administrative
2,729

 
2,149

 
5,883

 
4,302

Provision for credit losses
1,575

 
1,647

 
2,783

 
1,985

Depreciation and amortization
465

 
489

 
916

 
905

 
16,776

 
14,656

 
34,956

 
29,576

Expenses from consolidated VIE - RSO (see Note 19)
19,861

 
11,368

 
32,985

 
27,556

Elimination of consolidated VIE expenses attributed to operating segments
(3,053
)
 
(2,663
)
 
(5,872
)
 
(5,317
)
Total expenses
33,584

 
23,361

 
62,069

 
51,815

OPERATING INCOME
19,531

 
10,124

 
40,348

 
24,997

 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Gain on sale of investment securities, net
370

 
—

 
370

 
—

Other-than-temporary impairment on investments
—

 
—

 
—

 
(214
)
Interest expense
(497
)
 
(501
)
 
(980
)
 
(995
)
Other income, net
18

 
83

 
183

 
272

 
(109
)
 
(418
)
 
(427
)
 
(937
)
Other income, net, from consolidated VIE - RSO (see Note 19)
2,509

 
—

 
1,178

 
—

Elimination of consolidated VIE other income attributed to operating segments
11

 
31

 
29

 
62

 
2,411

 
(387
)
 
780

 
(875
)
Income from continuing operations before taxes
21,942

 
9,737

 
41,128

 
24,122

Income tax provision (benefit)
2,181

 
(1,511
)
 
3,250

 
(1,657
)
Income tax (benefit) provision - RSO
(446
)
 
1,737

 
(430
)
 
3,499

Income from continuing operations
20,207

 
9,511

 
38,308

 
22,280

Loss from discontinued operations, net of tax
—

 
—

 
—

 
(2
)
Net income
20,207

 
9,511

 
38,308

 
22,278

Net (income) loss attributable to noncontrolling interests
(84
)
 
(26
)
 
(44
)
 
17

Net income attributable to noncontrolling interests of consolidated VIE - RSO
(17,405
)
 
(8,372
)
 
(34,556
)
 
(20,686
)
Net income attributable to common shareholders
$
2,718

 
$
1,113

 
$
3,708

 
$
1,609

Amounts attributable to common shareholders:
 
 
 
 
 
 
 
Income from continuing operations
$
2,718

 
$
1,113

 
$
3,708

 
$
1,611

Discontinued operations
—

 
—

 
—

 
(2
)
Net income
$
2,718

 
$
1,113

 
$
3,708

 
$
1,609

 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
Continuing operations
$
0.13

 
$
0.05

 
$
0.18

 
$
0.08

Discontinued operations
—

 
—

 
—

 
—

Net income
$
0.13

 
$
0.05

 
$
0.18

 
$
0.08

Weighted average shares outstanding
20,386

 
20,297

 
20,320

 
20,219

 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
Continuing operations
$
0.12

 
$
0.05

 
$
0.17

 
$
0.07

Discontinued operations
—

 
—

 
—

 
—

Net income
$
0.12

 
$
0.05

 
$
0.17

 
$
0.07

Weighted average shares outstanding
22,032

 
22,106

 
22,031

 
21,969


The accompanying notes are an integral part of these statements
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5

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RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net income
$
20,207

 
$
9,511

 
$
38,308

 
$
22,278

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 

 
 

 
 
 
 
Unrealized gain (loss) on investment securities available-for-sale, net of tax of $33, $10, $52 and ($207)
129

 
15

 
157

 
(336
)
  Less: reclassification for (gains) losses realized, net of tax of $(139), $0, $(139) and $83
(231
)
 
—

 
(231
)
 
131

 
(102
)
 
15

 
(74
)
 
(205
)
Minimum pension liability - reclassification for losses realized, net of tax of $62, $55, $95 and $63
8

 
40

 
44

 
127

 
 
 
 
 
 
 
 
Unrealized gain on hedging contracts, net of tax of $1, $1, $1 and $7
3

 
2

 
4

 
7

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

 
—

 
—

Subtotal - activity related to RAI
(93
)
 
57

 
(26
)
 
(71
)
 
 
 
 
 
 
 
 
Activity related to consolidated VIE - RSO:
 
 
 
 
 
 
 
Reclassification adjustments for gains on available-for-sale securities realized in net income
2,722

 
(4,498
)
 
4,187

 
(5,125
)
Unrealized gains (losses) on available-for-sale securities, net
264

 
4,699

 
(1,490
)
 
9,922

Reclassification adjustments associated with realized losses from interest rate hedges included in net income
72

 
138

 
142

 
193

Unrealized gain on derivatives, net
803

 
1,330

 
1,190

 
1,982

Foreign currency translation gain
16

 
—

 
(180
)
 
—

Subtotal - activity related to RSO
3,877

 
1,669

 
3,849

 
6,972

Subtotal - other comprehensive income
3,784

 
1,726

 
3,823

 
6,901

Comprehensive income
23,991

 
11,237

 
42,131

 
29,179

Less: Comprehensive income attributable to noncontrolling interests
(21,366
)
 
(10,067
)
 
(38,449
)
 
(27,641
)
Comprehensive income attributable to common shareholders
$
2,625

 
$
1,170

 
$
3,682

 
$
1,538



The accompanying notes are an integral part of these statements
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6

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RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE SIX MONTHS ENDED JUNE 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
—

 
—

 
—

 
3,708

 
—

 
—

 
3,708

 
44

 
34,556

 
38,308

Treasury shares issued
29,595

 
—

 
(42
)
 
—

 
306

 
—

 
264

 
—

 
—

 
264

Exercise of warrants
303,921

 
3

 
1,547

 
—

 
—

 
—

 
1,550

 
—

 
—

 
1,550

Stock-based compensation
429,407

 
2

 
887

 
—

 
—

 
—

 
889

 
—

 
—

 
889

Repurchase of common stock
(262,361
)
 
—

 
—

 
—

 
(2,338
)
 
—

 
(2,338
)
 
—

 
—

 
(2,338
)
Dividends on common stock
—

 
—

 
—

 
(1,973
)
 
—

 
—

 
(1,973
)
 
—

 
—

 
(1,973
)
Change in non controlling interests in consolidated VIE - RSO
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
110,234

 
110,234

Other
—

 
—

 
—

 
—

 
—

 
—

 
—

 
24

 
—

 
24

Other comprehensive income (loss)
—

 
—

 
—

 
—

 
—

 
(26
)
 
(26
)
 
—

 
3,849

 
3,823

Balance, June 30, 2014
20,444,465

 
$
304

 
$
290,947

 
$
(24,290
)
 
$
(109,906
)
 
$
(1,257
)
 
$
155,798

 
$
306

 
$
892,003

 
$
1,048,107

 

The accompanying notes are an integral part of these statements
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RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Six Months Ended
 
June 30,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
38,308

 
$
22,278

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

 
 

Depreciation and amortization
992

 
996

Provision for credit losses
2,783

 
1,985

Unrealized gains on trading securities
(120
)
 
(484
)
Equity in earnings of unconsolidated entities
(1,678
)
 
(1,144
)
Distributions from unconsolidated entities
3,805

 
1,566

Other-than-temporary impairment on investments
—

 
214

Gain on sale of investment securities, net
(832
)
 
(1,716
)
Gain on sale of assets
(370
)
 
(1,623
)
Deferred income tax provision
3,250

 
(1,657
)
Equity-based compensation issued
845

 
610

Trading securities purchases and sales, net
(3,154
)
 
(618
)
Loss from discontinued operations
—

 
2

Changes in operating assets and liabilities
(12,605
)
 
2,007

Adjustments to reconcile net income and operating cash flows to net income of consolidated VIE - RSO
18,629

 
(58,209
)
Net cash provided by (used in) operating activities
49,853

 
(35,793
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(176
)
 
(474
)
Payments received on real estate loans and real estate
—

 
2,049

Investments in real estate and unconsolidated real estate entities
(1,194
)
 
(997
)
Principal payments on leases and loans
(2
)
 
(3
)
Purchase of loans and securities by consolidated VIE - RSO
(597,139
)
 
(473,710
)
Principal payments and proceeds from sales of loans and securities by consolidated VIE - RSO
365,922

 
584,201

Purchase of loans and investments
(1,318
)
 
(1,522
)
Proceeds from sale of loans and investments
721

 
—

Increase (decrease) in restricted cash of consolidated VIE - RSO
10,543

 
(5,926
)
Other investing activity of consolidated VIE - RSO
10,655

 
(15,419
)
Net cash (used in) provided by investing activities
(211,988
)
 
88,199

 
 
 
 

The accompanying notes are an integral part of these statements
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RESOURCE AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(in thousands)
(unaudited)
 
Six Months Ended
 
June 30,
 
2014
 
2013
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Increase in borrowings
2,500

 
2,000

Principal payments on borrowings
(2,706
)
 
(2,243
)
Net borrowings (repayments) of debt by consolidated VIE - RSO
48,965

 
(182,637
)
Dividends paid
(1,964
)
 
(1,183
)
Dividends paid on common stock by consolidated VIE - RSO
(50,313
)
 
(42,542
)
Proceeds from issuance of common stock
1,550

 
1,253

Net proceeds from issuance of common stock by consolidated VIE - RSO
163,319

 
179,826

Repurchases of common stock
(2,083
)
 
(54
)
Increase in restricted cash
(84
)
 
—

Other
—

 
228

Other financing activity of consolidated VIE - RSO
(5,044
)
 
(6,285
)
Net cash provided by (used in) financing activities
154,140

 
(51,637
)
CASH FLOWS FROM DISCONTINUED OPERATIONS:
 

 
 

Operating activities
—

 
(495
)
Net cash used in discontinued operations
—

 
(495
)
 
 
 
 
(Decrease) increase in cash
(7,995
)
 
274

Cash, beginning of year
19,853

 
11,899

Cash, end of period
$
11,858

 
$
12,173







The accompanying notes are an integral part of these statements
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 six months ended June 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 financial fund management segment makes assumptions in determining the fair value of its 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.



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10
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 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 for which there are indications of impairment, the Company estimates the cash flows through the sale of the underlying properties based on projected net operating income as a multiple of published capitalization rates, as reduced by the underlying mortgage balances and priority distributions due to the investors.
Investment Securities
The Company’s investment securities available-for-sale, including investments in the collateralized loan obligation ("CLO") issuers it sponsored, are carried at fair value.  The fair value of the CLO investments is based primarily on internally-generated expected cash flow models that require significant management judgment and estimates due to the lack of market activity and the use of unobservable pricing inputs.  The investments in the common stock of The Bancorp, Inc. (“TBBK”) (NASDAQ: TBBK) and in Resource Real Estate Diversified Income Fund ("DIF") (NASDAQ: RREDX), affiliated entities, are valued at the closing prices of the respective publicly-traded stocks.  The Company's investment in Resource Real Estate Global Property Securities ("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.
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 six months ended June 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.

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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 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 position, results of operations or cash flows.
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.


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

NOTE 3 - CONSOLIDATING FINANCIAL INFORMATION
The following table presents the consolidating balance sheet as of June 30, 2014 (in thousands):
 
RAI
 
RSO
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
Cash
$
11,858

 
$
—

 
$
—

 
$
11,858

Restricted cash
654

 
—

 
—

 
654

Receivables
3,486

 
—

 
(86
)
 
3,400

Receivables from managed entities and related parties, net
35,146

 
—

 
(2,560
)
 
32,586

Investments in real estate, net
17,084

 
—

 
—

 
17,084

Investment securities, at fair value
28,710

 
—

 
(16,120
)
 
12,590

Investments in unconsolidated loan manager
38,461

 
—

 
—

 
38,461

Investments in unconsolidated entities
13,448

 
—

 
—

 
13,448

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

 
313,528

 
—

 
313,528

     Investments, at fair value
—

 
273,454

 
—

 
273,454

     Loans
—

 
1,785,693

 
(558
)
 
1,785,135

     Investments in real estate and unconsolidated entities
—

 
89,989

 
—

 
89,989

     Other assets - RSO
—

 
96,085

 
(23
)
 
96,062

Total assets of consolidated VIE - RSO
—

 
2,558,749

 
(581
)
 
2,558,168

Property and equipment, net
5,378

 
—

 
—

 
5,378

Deferred tax assets, net
33,258

 
—

 
(8,651
)
 
24,607

Other assets
5,212

 
—

 
—

 
5,212

Total assets
$
192,695

 
$
2,558,749

 
$
(27,998
)
 
$
2,723,446

 
 
 
 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Accrued expenses and other liabilities
$
16,846

 
$
—

 
$
—

 
$
16,846

Payables to managed entities and related parties
3,631

 
—

 
(23
)
 
3,608

Borrowings
21,116

 
—

 
(558
)
 
20,558

Liabilities of consolidated VIE - RSO:
 
 
 
 
 
 
 
     Borrowings
—

 
1,579,834

 
151

 
1,579,985

     Other liabilities
—

 
56,988

 
(2,646
)
 
54,342

Total liabilities of consolidated VIE - RSO
—

 
1,636,822

 
(2,495
)
 
1,634,327

Total liabilities
41,593

 
1,636,822

 
(3,076
)
 
1,675,339

Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity:
 
 
 
 
 
 
 
Preferred stock
—

 
—

 
—

 
—

Common stock
304

 
—

 
—

 
304

Additional paid-in capital
290,947

 
—

 
—

 
290,947

Accumulated deficit
(19,560
)
 
—

 
(4,730
)
 
(24,290
)
Treasury stock, at cost
(109,906
)
 
—

 
—

 
(109,906
)
Accumulated other comprehensive loss
(10,989
)
 
—

 
9,732

 
(1,257
)
Total stockholders’ equity
150,796

 
—

 
5,002

 
155,798

Noncontrolling interests
306

 
—

 
—

 
306

Noncontrolling interest attributable to RSO
—

 
921,927

 
(29,924
)
 
892,003

Total equity
151,102

 
921,927

 
(24,922
)
 
1,048,107

 
$
192,695

 
$
2,558,749

 
$
(27,998
)
 
$
2,723,446


    

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13
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)


The following table presents the consolidating statement of operations for the three months ended June 30, 2014 (in thousands):
 
RAI
 
RSO
 
Eliminations
 
Consolidated
REVENUES:
 
 
 
 
 
 
 
Real estate
$
13,448

 
$
—

 
$
—

 
$
13,448

Financial fund management
8,141

 
—

 
—

 
8,141

Commercial finance
(42
)
 
—

 
—

 
(42
)
 
21,547

 
—

 
—

 
21,547

Revenues from consolidated VIE - RSO
—

 
34,608

 
—

 
34,608

Elimination of consolidated VIE revenues attributed to operating segments
—

 
—

 
(3,040
)
 
(3,040
)
Total revenues
21,547

 
34,608

 
(3,040
)
 
53,115

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Real estate
9,105

 
—

 
—

 
9,105

Financial fund management
2,779

 
—

 
—

 
2,779

Commercial finance
123

 
—

 
—

 
123

General and administrative
2,729

 
—

 
—

 
2,729

Provision for credit losses
1,575

 
—

 
—

 
1,575

Depreciation and amortization
465

 
—

 
—

 
465

 
16,776

 
—

 
—

 
16,776

Expenses of consolidated VIE - RSO
—

 
19,415

 
446

 
19,861

Elimination of consolidated VIE expenses attributed to operating segments
—

 
—

 
(3,053
)
 
(3,053
)
Total expenses
16,776

 
19,415

 
(2,607
)
 
33,584

OPERATING INCOME
4,771

 
15,193

 
(433
)
 
19,531

 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Gain on sale of investment securities, net
370

 
—

 
—

 
370

Interest expense
(497
)
 
—

 
—

 
(497
)
Other income, net
590

 
—

 
(572
)
 
18

Other income, net, from consolidated VIE - RSO
—

 
2,509

 
—

 
2,509

Elimination of consolidated VIE other expense, net
—

 
—

 
11

 
11

 
463

 
2,509

 
(561
)
 
2,411

Income from continuing operations before taxes
5,234

 
17,702

 
(994
)
 
21,942

Income tax provision
2,181

 
—

 
(446
)
 
1,735

Net income
3,053

 
17,702

 
(548
)
 
20,207

Net income attributable to noncontrolling interests
(84
)
 
—

 
—

 
(84
)
Net income attributable to noncontrolling interests - RSO
—

 
(3,025
)
 
(14,380
)
 
(17,405
)
Net income attributable to common shareholders
$
2,969

 
$
14,677

 
$
(14,928
)
 
$
2,718

    
    

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14
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)

The following table presents the consolidating statement of operations for the three months ended June 30, 2013 (in thousands):
 
RAI
 
RSO
 
Eliminations
 
Consolidated
REVENUES:
 
 
 
 
 
 
 
Real estate
$
12,153

 
$
—

 
$
—

 
$
12,153

Financial fund management
2,445

 
—

 
—

 
2,445

Commercial finance
(35
)
 
—

 
—

 
(35
)
 
14,563

 
—

 
—

 
14,563

Revenues from consolidated VIE - RSO
—

 
21,647

 
—

 
21,647

Elimination of consolidated VIE revenues attributed to operating segments
—

 
—

 
(2,725
)
 
(2,725
)
Total revenues
14,563

 
21,647

 
(2,725
)
 
33,485

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Real estate
8,896

 
—

 
—

 
8,896

Financial fund management
1,694

 
—

 
—

 
1,694

Commercial finance
(219
)
 
—

 
—

 
(219
)
General and administrative
2,149

 
—

 
—

 
2,149

Provision for credit losses
1,647

 
—

 
—

 
1,647

Depreciation and amortization
489

 
—

 
—

 
489

 
14,656

 
—

 
—

 
14,656

Expenses of consolidated VIE - RSO
—

 
13,105

 
(1,737
)
 
11,368

Elimination of consolidated VIE expenses attributed to operating segments
—

 
—

 
(2,663
)
 
(2,663
)
Total expenses
14,656

 
13,105

 
(4,400
)
 
23,361

OPERATING INCOME
(93
)
 
8,542

 
1,675

 
10,124

 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 
 
 
 
 
 
Interest expense
(501
)
 
—

 
—

 
(501
)
Other income, net
640

 
—

 
(557
)
 
83

Elimination of consolidated VIE other expense, net
—

 
—

 
31

 
31

 
139

 
—

 
(526
)
 
(387
)
Income from continuing operations before taxes
46

 
8,542

 
1,149

 
9,737

Income tax provision
(1,511
)
 
—

 
1,737

 
226

Net income
1,557

 
8,542

 
(588
)
 
9,511

Net loss attributable to noncontrolling interests
(26
)
 
—

 
—

 
(26
)
Net income attributable to noncontrolling interests - RSO
—

 
(1,800
)
 
(6,572
)
 
(8,372
)
Net income attributable to common shareholders
$
1,531

 
$
6,742

 
$
(7,160
)
 
$
1,113

 
 
 
 
 
 
 
 
Amounts attributable to common shareholders:
 
 
 
 
 
 
 
Income from continuing operations
$
1,531

 
$
6,742

 
$
(7,160
)
 
$
1,113

Discontinued operations
—

 
—

 
—

 
—

Net income
$
1,531

 
$
6,742

 
$
(7,160
)
 
$
1,113


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15
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)

The following table presents the consolidating statement of operations for the six months ended June 30, 2014 (in thousands):
 
RAI
 
RSO
 
Eliminations
 
Consolidated
REVENUES:
 
 
 
 
 
 
 
Real estate
$
26,723

 
$
—

 
$
—

 
$
26,723

Financial fund management
15,216

 
—

 
—

 
15,216

Commercial finance
(141
)
 
—

 
—

 
(141
)
 
41,798

 
—

 
—

 
41,798

Revenues from consolidated VIE - RSO
—

 
66,539

 
—

 
66,539

Elimination of consolidated VIE revenues attributed to operating segments
—

 
—

 
(5,920
)
 
(5,920
)
Total revenues
41,798

 
66,539

 
(5,920
)
 
102,417

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Real estate
17,980

 
—

 
—

 
17,980

Financial fund management
7,168

 
—

 
—

 
7,168

Commercial finance
226

 
—

 
—

 
226

General and administrative
5,883

 
—

 
—

 
5,883

Provision for credit losses
2,783

 
—

 
—

 
2,783

Depreciation and amortization
916

 
—

 
—

 
916

 
34,956

 
—

 
—

 
34,956

Expenses of consolidated VIE - RSO
—

 
32,555

 
430

 
32,985

Elimination of consolidated VIE expenses attributed to operating segments
—

 
—

 
(5,872
)
 
(5,872
)
Total expenses
34,956

 
32,555

 
(5,442
)
 
62,069

OPERATING INCOME
6,842

 
33,984

 
(478
)
 
40,348

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

 
—

 
—

 
—

Gain on sale of investment securities, net
370

 
—

 
—

 
370

Interest expense
(980
)
 
—

 
—

 
(980
)
Other income, net
1,327

 
—

 
(1,144
)
 
183

Other income, net, from consolidated VIE - RSO
—

 
1,178

 
—

 
1,178

Elimination of consolidated VIE other income, net
—

 
—

 
29

 
29

 
717

 
1,178

 
(1,115
)
 
780

(Loss) income from continuing operations before taxes
7,559

 
35,162

 
(1,593
)
 
41,128

Income tax provision
3,250

 
—

 
(430
)
 
2,820

Net income
4,309

 
35,162

 
(1,163
)
 
38,308

Net income attributable to noncontrolling interests
(44
)
 
—

 
—

 
(44
)
Net income attributable to noncontrolling interests - RSO
—

 
(5,369
)
 
(29,187
)
 
(34,556
)
Net income attributable to common shareholders
$
4,265

 
$
29,793

 
$
(30,350
)
 
$
3,708

 
 
 
 
 
 
 
 


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16
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)

The following table presents the consolidating statement of cash flows for the six months ended June 30, 2014 (in thousands):
 
RAI
 
RSO
 
Eliminations
 
Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
Net income
$
4,309

 
$
35,162

 
$
(1,163
)
 
$
38,308

Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
992

 
—

 
—

 
992

Provision for credit losses
2,783

 
—

 
—

 
2,783

Unrealized gains on trading securities
(98
)
 
—

 
(22
)
 
(120
)
Equity in earnings of unconsolidated entities
(1,678
)
 
—

 
—

 
(1,678
)
Distributions from unconsolidated entities
3,805

 
—

 
—

 
3,805

Gain on sale of investment securities, net
(927
)
 
—

 
95

 
(832
)
Gain on sale of assets
(370
)
 
—

 
—

 
(370
)
Deferred income tax provision
3,250

 
—

 
—

 
3,250

Equity-based compensation issued
845

 
—

 
—

 
845

Trading securities purchases and sales, net
(3,154
)
 
—

 
—

 
(3,154
)
Changes in operating assets and liabilities
(12,605
)
 
—

 
—

 
(12,605
)
Adjustments to reconcile net income and operating cash flows to net income of consolidated VIE - RSO
—

 
18,683

 
(54
)
 
18,629

Net cash (used in) provided by operating activities
(2,848
)
 
53,845

 
(1,144
)
 
49,853

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
Capital expenditures
(176
)
 
—

 
—

 
(176
)
Principal payments on leases and loans
(2
)
 
—

 
—

 
(2
)
Investments in real estate and unconsolidated real estate entities
(1,194
)
 
—

 
—

 
(1,194
)
Purchase of loans and securities by consolidated VIE - RSO
—

 
(597,139
)
 
—

 
(597,139
)
Principal payments and proceeds from sales of loans and securities by consolidated VIE - RSO
—

 
365,922

 
—

 
365,922

Purchase of loans and investments
(1,318
)
 
—

 
—

 
(1,318
)
Proceeds from sale of loans and investments
721

 
—

 
—

 
721

Increase in restricted cash of consolidated VIE - RSO
—

 
10,543

 
—

 
10,543

Other investing activity of consolidated VIE - RSO
—

 
11,046

 
(391
)
 
10,655

Net cash (used in) provided by investing activities
(1,969
)
 
(209,628
)
 
(391
)
 
(211,988
)

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17
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)

 
RAI
 
RSO
 
Eliminations
 
Consolidated
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 

 
 
Increase in borrowings
2,500

 
—

 
—

 
2,500

Principal payments on borrowings
(3,097
)
 
—

 
391

 
(2,706
)
Net borrowings (repayments) of debt by consolidated VIE - RSO
—

 
48,965

 
—

 
48,965

Dividends paid
(1,964
)
 
—

 
—

 
(1,964
)
Dividends paid on common stock by consolidated VIE - RSO
—

 
(51,457
)
 
1,144

 
(50,313
)
Proceeds from issuance of common stock
1,550

 
—

 
—

 
1,550

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

 
163,319

 
—

 
163,319

Repurchases of common stock
(2,083
)
 
—

 
—

 
(2,083
)
Increase in restricted cash
(84
)
 
—

 
—

 
(84
)
Other financing activity of consolidated VIE - RSO
—

 
(5,044
)
 
—

 
(5,044
)
Net cash (used in) provided by financing activities
(3,178
)
 
155,783

 
1,535

 
154,140

 
 
 
 
 
 
 
 
Decrease in cash
(7,995
)
 
—

 
—

 
(7,995
)
Cash, beginning of year
19,853

 
—

 
—

 
19,853

Cash, end of period
$
11,858

 
$
—

 
$
—

 
$
11,858

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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18
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)

NOTE 4 – SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows (in thousands, per share data):
 
Six Months Ended
 
June 30,
 
2014
 
2013
Cash (paid) received:
 
 
 
Interest
$
(828
)
 
$
(840
)
Income tax payments
(916
)
 
(916
)
Refund of income taxes
48

 
13

 
 
 
 
Dividends declared per common share
$
0.10

 
$
0.06

 
 
 
 
Non-cash activities:
 

 
 

Repurchases of common stock from employees in exchange for the payment of income taxes
$
255

 
$
49

Issuance of treasury stock for the Company's investment savings 401(k) plan
306

 
184

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 June 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 (2)
$
—

 
$
—

 
$
43,291

 
$
43,291

 
$
19

 
$
43,310

Real estate investment entities
580

 
1,149

 
17,839

 
19,568

 
5,809

 
25,377

Financial fund management entities
1

 
—

 
18

 
19

 
449

 
468

Other
22

 
—

 
—

 
22

 
2,437

 
2,459

 
603

 
1,149

 
61,148

 
62,900

 
8,714

 
71,614

Rent receivables - real estate
4

 
1

 
1

 
6

 
94

 
100

Total financing receivables
$
607

 
$
1,150

 
$
61,149

 
$
62,906

 
$
8,808

 
$
71,714

 
(1)
Receivables are presented gross of an allowance for credit losses of $39.0 million related to the Company’s commercial finance investment entities.  The remaining receivables from managed entities and related parties have no related allowance for credit losses.
(2)
Pursuant to a guarantee agreement, the Company made a payment to the lender of one of its commercial finance investment partnerships. In making the payment, the Company assumed the rights of the lender, with the resulting note being collateralized by the portfolio of leases and loans held by the partnership (see Note 17).
    

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19
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 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 June 30, 2014:
 
 
 
 
 
 
 
Balance, beginning of period
$
37,441

 
$
—

 
$
10

 
$
37,451

Provision for credit losses
1,588

 
(5
)
 
(8
)
 
1,575

Charge-offs
(1
)
 
—

 
—

 
(1
)
Recoveries
—

 
5

 
—

 
5

Balance, end of period
$
39,028

 
$
—

 
$
2

 
$
39,030

 
 
 
 
 
 
 
 
Six Months Ended June 30, 2014:
 

 
 

 
 

 
 

Balance, beginning of year
$
36,229

 
$
—

 
$
14

 
$
36,243

Provision for credit losses
2,801

 
(6
)
 
(12
)
 
2,783

Charge-offs
(2
)
 
—

 
—

 
(2
)
Recoveries
—

 
6

 
—

 
6

Balance, end of period
$
39,028

 
$
—

 
$
2

 
$
39,030

 
 
 
 
 
 
 
 
Ending balance, individually evaluated for impairment
$
39,028

 
$
—

 
$
—

 
$
39,028

Ending balance, collectively evaluated for impairment
—

 
—

 
2

 
2

Balance, end of period
$
39,028

 
$
—

 
$
2

 
$
39,030


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20
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)

 
Loans and receivables
from Managed
Entities
 
Leases and
Loans
 
Rent
Receivables
 
Total
Three Months Ended June 30, 2013:
 
 
 
 
 
 
 
Balance, beginning of period
$
32,906

 
$
—

 
$
54

 
$
32,960

Provision for credit losses
1,677

 
(4
)
 
(26
)
 
1,647

Charge-offs
—

 
—

 
1

 
1

Recoveries
4

 
4

 
—

 
8

Balance, end of period
$
34,587

 
$
—

 
$
29

 
$
34,616

 
 
 
 
 
 
 
 
Six Months Ended June 30, 2013:
 

 
 

 
 

 
 

Balance, beginning of year
$
32,560

 
$
—

 
$
68

 
$
32,628

Provision for credit losses
2,007

 
(7
)
 
(15
)
 
1,985

Charge-offs
—

 
—

 
(24
)
 
(24
)
Recoveries
20

 
7

 
—

 
27

Balance, end of period
$
34,587

 
$
—

 
$
29

 
$
34,616

 
 
 
 
 
 
 
 
Ending balance, individually evaluated for impairment
$
34,587

 
$
—

 
$
—

 
$
34,587

Ending balance, collectively evaluated for impairment
—

 
—

 
29

 
29

Balance, end of period
$
34,587

 
$
—

 
$
29

 
$
34,616

The Company’s financing receivables (presented exclusive of any allowance for credit losses) as of June 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
$
71,614

 
$
—

 
$
71,614

Ending balance, collectively evaluated for impairment
—

 
100

 
100

Balance, end of period
$
71,614

 
$
100

 
$
71,714

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


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21
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 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 June 30, 2014
 
 
 
 
 
 
 
Financing receivables with a specific valuation allowance:
 

 
 

 
 

 
 

Loans and receivables from managed entities – commercial finance
$
1,401

 
$
40,429

 
$
39,028

 
$
39,621

Rent receivables – real estate
—

 
2

 
2

 
14

 
 
 
 
 
 
 
 
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 June 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):
 
June 30,
2014
 
December 31,
2013
Properties owned, net of accumulated depreciation of $8,928 and $8,666:
 
 
 
  Hotel property (Savannah, Georgia)
$
10,202

 
$
10,504

  Office building (Philadelphia, Pennsylvania)
791

 
781

 
10,993

 
11,285

Partnerships and other investments
6,091

 
6,411

Total investments in real estate, net
$
17,084

 
$
17,696

The contractual future minimum rental income on non-cancelable operating leases included in properties owned for each of the five succeeding annual periods ending June 30, and thereafter, are as follows (in thousands):
2015
$
1,080

2016
742

2017
658

2018
614

2019
436

Thereafter
525

Total
$
4,055

NOTE 7 − INVESTMENT SECURITIES
Components of investment securities are as follows (in thousands):
 
June 30,
2014
 
December 31,
2013
Available-for-sale securities
$
8,069

 
$
7,522

Trading securities
4,521

 
317

Total investment securities, at fair value
$
12,590

 
$
7,839

    

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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 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
June 30, 2014
 
 
 
 
 
 
 
CLO securities
$
5,996

 
$
1,149

 
$
(119
)
 
$
7,026

Equity securities
888

 
155

 
—

 
1,043

Total
$
6,884

 
$
1,304

 
$
(119
)
 
$
8,069

 
 
 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

 
 

CLO securities
$
5,971

 
$
1,315

 
$
(196
)
 
$
7,090

Equity securities
208

 
232

 
(8
)
 
432

Total
$
6,179

 
$
1,547

 
$
(204
)
 
$
7,522

CLO securities.  The CLO securities represent the Company’s retained equity interest in ten CLO issuers that CVC Credit Partners, LLC ("CVC Credit Partners") manages at June 30, 2014 and December 31, 2013 (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 six months ended June 30, 2014, the Company purchased 749,976 units of RREGPS for $677,400.
Trading securities. The Company had net gains on trading securities of $870,000 and $987,000 during the three and six months ended June 30, 2014, respectively, including unrealized losses of $192,000 and unrealized gains of $120,000, respectively, which were included in Financial Fund Management Revenues on the consolidated statements of operations. The Company had net gains on trading securities of $1.2 million and $1.7 million during the three and six months ended June 30, 2013, respectively, including unrealized losses of $262,000 and unrealized gains of $484,000, 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
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
CLO securities
$
660

 
$
(58
)
 
1

 
$
1,058

 
$
(61
)
 
1

Equity securities
—

 
—

 
—

 
—

 
—

 
—

Total
$
660

 
$
(58
)
 
1

 
$
1,058

 
$
(61
)
 
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 six months ended June 30, 2014, there were no impairment losses. In the three and six months ended June 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.    


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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 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
 
June 30,
 
December 31,
 
 
2014
 
2013
Real estate investment entities
1% – 12%
 
$
8,555

 
$
8,271

Financial fund management partnerships
0.4% − 50%
 
4,215

 
5,294

Trapeza entities
33% − 50%
 
678

 
777

Investments in unconsolidated entities
 
 
$
13,448

 
$
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 on the cost method since the Company has less than a 1% ownership.
The Company evaluates all of these investments for impairment on a quarterly basis. There were no identified events that had a significant adverse effect on these investments and, as such, no impairment has been recorded.
Investment in Unconsolidated Loan Manager. 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Management fee revenues
$
14,399

 
$
15,841

 
$
26,787

 
$
24,089

Costs and expenses
(13,551
)
 
(17,285
)
 
(24,847
)
 
(23,770
)
Net income (loss)
$
848

 
$
(1,444
)
 
$
1,940

 
$
319

Portion of net income (loss) attributable to the Company
$
280

 
$
(477
)
 
$
641

 
$
105

In conjunction with the CVC Credit Partners joint venture, the Company retained a preferred interest in Apidos (which became a subsidiary of CVC Credit Partners) relating to incentive management fees on legacy CLOs that had been sponsored and managed by Apidos. The Company accounts for this interest, with a book value of $6.8 million at June 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.


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24
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 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):
 
June 30,
2014
 
December 31,
2013
Accounts payable and other accrued liabilities
$
5,745

 
$
7,439

Supplemental executive retirement plan ("SERP") liability (see Note 14)
4,639

 
4,998

Accrued wages and benefits
2,094

 
4,304

Deferred rent
2,546

 
2,675

Apidos contractual obligation, at fair value (see Note 16)
815

 
995

Dividends payable
986

 
977

Short term insurance notes
21

 
746

  Total accrued expenses and other liabilities
$
16,846

 
$
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 June 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
3,361

 
—

 
—

 
 

 
—

 
—

Other debt:
 
 
 
 
 
Senior Notes
 

 
10,000

 
10,000

Mortgage debt - hotel property
 

 
10,188

 
10,287

Other debt
 

 
370

 
332

Total borrowings outstanding
 

 
$
20,558

 
$
20,619


(1)
The amount of the facility as shown has been reduced for outstanding letters of credit of $503,000 at June 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.  
    

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

There were no borrowings outstanding as of June 30, 2014 and the availability on the TD facility was $11.0 million, as reduced for letters of credit. For the three and six months ended June 30, 2014 and three months ended June 30, 2013, there were no borrowings outstanding on the line of credit. For the six months ended June 30, 2013, weighted average borrowings were $298,000 at a weighted average borrowing rate of 3.2%.
Republic First Bank (“Republic Bank”). In February 2011, the Company entered into a $3.5 million revolving credit facility with Republic Bank.  The facility bears interest at the prime rate of interest plus 1% with a floor of 4.5%.  The loan is secured by a pledge of 700,000 shares of RSO stock 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 June 30, 2014 and the availability was $3.4 million. Weighted average borrowings for the three and six months ended June 30, 2014 were $1.8 million and $925,000 at a weighted average rate of 5.2% and 6.4%. There were no borrowings under this facility during the three and six months ended June 30, 2013.
Senior Notes
The Company's $10.0 million of 9% senior notes mature on March 31, 2015. The notes were issued with detachable 5-year warrants to purchase 3,690,195 shares of common stock, of which warrants to purchase 3,140,686 of common stock were outstanding as of June 30, 2014. The effective interest rate for the three and six months ended June 30, 2014 was 9.4% and 9.4%, respectively, and 9.9% and 9.7% for the three and six months ended June 30, 2013, respectively.
Other Debt
In June 2014, the Company entered into a three year capital lease for the purchase of computer equipment at an interest rate of 1.0%. The lease requires monthly repayments of $4,205. The principal balance of the lease at June 30, 2014 was $149,000.
Debt repayments
Annual principal payments on the Company’s aggregate borrowings for the next five years ending June 30, 2014, and thereafter, are as follows (in thousands):
2015
$
10,442

2016
299

2017
283

2018
248

2019
265

Thereafter
9,021

Total
$
20,558


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26
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)

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 June 30, 2014.
NOTE 11 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net income (loss) and all other changes in the equity of a business from transactions and other events and circumstances from non-owner sources.  These changes, other than net income (loss), are referred to as “other comprehensive income (loss)” and for the Company include primarily changes in the fair value, net of tax, of its investment securities available-for-sale and pension liability.  Other comprehensive income (loss) also includes the Company’s share of unrealized losses on hedging contracts held by the commercial finance investment partnerships and LEAF Commercial Capital, Inc. ("LEAF").        
The following are changes in accumulated other comprehensive income (loss) by category (in thousands):
 
Investment Securities
Available-for-Sale
 
Cash Flow Hedges
 
Foreign Currency
Translation Adjustments
 
SERP Pension
Liability
 
Total
Balance, December 31, 2013, net of tax of $543, $(1), $(2) and $(1,853)
$
801

 
$
(4
)
 
$
(2
)
 
$
(2,026
)
 
$
(1,231
)
Current-period other comprehensive income
(74
)
 
4

 
—

 
44

 
(26
)
Balance, June 30, 2014 net of tax of $457, $0, $0 and $(1,758)
$
727

 
$
—

 
$
(2
)
 
$
(1,982
)
 
$
(1,257
)

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 adjustment
 
Investment securities

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27
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)

NOTE 12 – NONCONTROLLING INTERESTS
The following table presents the activity in noncontrolling interests (in thousands):
 
For the Six Months Ended 
 June 30, 2014
 
RSO
 
RAI
Noncontrolling interests, beginning of year
$
743,364

 
$
238

Net income attributable to noncontrolling interests
34,556

 
44

Other comprehensive income
3,849

 
—

Proceeds from issuance of equity interests, net
163,418

 
—

Amortization of stock-based compensation
3,698

 
—

Distributions to noncontrolling interests
(56,882
)
 
—

Other
—

 
24

Noncontrolling interests, end of period
$
892,003

 
$
306


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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Shares
 
 
 
 
 
 
 
Basic shares outstanding
20,386

 
20,297

 
20,320

 
20,219

Dilutive effect of outstanding stock options, warrants and director units
1,646

 
1,809

 
1,711

 
1,750

Diluted shares outstanding
22,032

 
22,106

 
22,031

 
21,969

    
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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Interest cost
$
69

 
$
56

 
$
137

 
$
112

Less: expected return on plan assets
(39
)
 
(25
)
 
(78
)
 
(50
)
Plus: Amortization of unrecognized loss
69

 
95

 
139

 
190

Net cost
$
99

 
$
126

 
$
198

 
$
252

Restricted stock.  During the six months ended June 30, 2014, the Company awarded a total of 417,407 shares of restricted stock valued at $3.7 million based on the closing price of the stock on the respective grant date.

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28
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 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):
 
June 30,
2014
 
December 31,
2013
Loans and receivables from managed entities and related parties, net:
 
 
 
Real estate investment entities
$
25,377

 
$
21,487

Commercial finance investment entities (1)
3,596

 
8,174

Financial fund management investment entities
468

 
1,138

Other
389

 
124

Loan to CVC Credit Partners
2,070

 
—

Loan to LEAF I (2)
686

 
—

Receivables from managed entities and related parties
$
32,586

 
$
30,923

 
 
 
 
Payables due to managed entities and related parties, net:
 

 
 

Real estate investment entities (3) 
$
3,487

 
$
2,940

Other
121

 
170

Payables to managed entities and related parties
$
3,608

 
$
3,110

 
(1)
Net of reserves for credit losses of $39.0 million and $36.2 million as of June 30, 2014 and December 31, 2013, respectively, related to management fees owed from three commercial finance investment entities that, based on estimated cash distributions, are not expected to be collectible.
(2)
Pursuant to a guarantee agreement, the Company made a payment to the lender of one of its commercial finance investment partnerships. In making the payment, the Company assumed the rights of the lender, with the resulting balance being collateralized by the portfolio of leases and loans held by the partnership (see Note 17).
(3)
Reflects $3.5 million and $2.9 million in funds provided by the real estate investment entities as of June 30, 2014 and December 31, 2013, which are held by the Company to self-insure the properties held by those entities.

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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Fees from unconsolidated investment entities:
 
 
 
 
 
 
 
Real estate (1) 
$
8,519

 
$
5,353

 
$
17,444

 
$
9,547

Financial fund management
1,265

 
786

 
2,067

 
1,534

Commercial finance (2) 
—

 
—

 
—

 
—

CVC Credit Partners – reimbursement of net costs and expenses
444

 
307

 
625

 
684

RRE Opportunity REIT I:
 
 
 
 
 
 
 
Reimbursement of costs and expenses
564

 
197

 
915

 
401

Dividends paid
29

 
24

 
58

 
57

RRE Opportunity REIT II:
 
 
 
 
 
 
 
Reimbursement of costs and expenses
446

 
—

 
948

 
—

LEAF:
 
 
 
 
 
 
 
Payment for sub-servicing the commercial finance
   investment partnerships
(74
)
 
(243
)
 
(201
)
 
(546
)
Payment for rent and related expenses
—

 
(200
)
 
—

 
(399
)
Reimbursement of net costs and expenses
28

 
58

 
64

 
115

1845 Walnut Associates Ltd:
 
 
 
 
 
 
 
Payment for rent and related expenses
(203
)
 
(33
)
 
(407
)
 
(190
)
Property management fees
77

 
75

 
93

 
117

Brandywine Construction & Management, Inc. –
  payment for property management of hotel property
(72
)
 
(70
)
 
(112
)
 
(113
)
Atlas Energy, L.P. – reimbursement of net costs and expenses
42

 
53

 
72

 
194

Ledgewood P.C. – payment for legal services 
(43
)
 
(43
)
 
(67
)
 
(104
)
Graphic Images, LLC – payment for printing services
(29
)
 
(15
)
 
(89
)
 
(39
)
The Bancorp, Inc. – reimbursement of net costs and expenses
28

 
28

 
55

 
56

9 Henmar LLC – payment of broker/consulting fees 
(15
)
 
(17
)
 
(18
)
 
(20
)
 
(1)
Reflects discounts recorded by the Company of $41,000 and $74,000 recorded in the three and six months ended June 30, 2014, respectively, and $37,000 and $113,000 recorded in the three and six months ended June 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 six months ended June 30, 2014, the Company waived $276,000 and $500,000, respectively, and $483,000 and $1.1 million, during the three and six months ended June 30, 2013, respectively, of its fund management fees from its commercial finance investment entities.

On February 6, 2014, Opportunity REIT II commenced its initial public offering of 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, will be the external manager. As of June 30, 2014, the Company had a $3.0 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 and a maturity date of six months. The loan and related interest were repaid in full by June 30, 2014.


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

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%. The advance and accrued interest are due in full when the loan matures on October 1, 2014.
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 June 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 $37,000 of interest income on this loan during the three and six months ended June 30, 2014, respectively, and $18,000 and $36,000 during the three and six months ended June 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 July 2014, the Company and certain of its employees, together with RSO, purchased a portfolio of securities for $23.5 million. The portfolio, to be held by a subsidiary of RSO, RCM Global LLC, will be 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.

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31
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 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 7.30% - 10.35%). 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 June 30, 2014 (Level 2).
Investment securities − trading securities. The Company holds nine securities within its trading portfolio, eight of which are debt or equity investments in externally managed CDOs and one of which is a term loan (Level 3).  
•
One of the CDOs is substantially through the liquidation process. Accordingly, the Company has valued its investment based on the CDO's NAV, which reflects the remaining cash flows to the beneficial owners of the CDOs once all obligations have been paid in full.  In performing its analysis, the Company reviewed the trustee note valuation reports for CDO payments and collateral performance, and used financial software to provide the terms of the CDO’s structure as well as market data to be used comparatively.
•
One of the CDOs is an illiquid European CDO equity investment, valued based on recent market trading data for similar securities.
•
Three of the CDOs were valued using a cash flow method, assuming a 2% constant default rate, 20% constant prepayment rate, 30% loss severity rate, and with yield returns between 11.5% and 16.5%.
•
Two of the CDOs were valued at the NAV of the underlying assets, supported by recent market trading activity in the same security.
•
One loan position was valued based on recent observable trades of the same security.
Investment securities − CLO securities. The fair value of CLO securities is based on internally generated expected cash flow models that require significant management judgments and estimates due to the lack of market activity and unobservable pricing inputs. Unobservable inputs into these models include default, recovery, discount and deferral rates, prepayment speeds and reinvestment interest spreads (Level 3).
The significant unobservable inputs used in the fair value measurement of the Company's CLO securities are prepayment rates, probability of default, loss severity rate, reinvestment price on underlying collateral and the discount rate. Significant increases (decreases) in the default or discount rates in isolation would result in a significantly lower (higher) fair value measurement, whereas significant increases (decreases) in the recovery rate, prepayment rate or reinvestment price in isolation would result in a significantly higher (lower) fair value measurement.  Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the discount rate and a directionally opposite change in the assumption used for prepayment rates, recovery rates and reinvestment prices on underlying collateral. 
Investment in Apidos-CVC preferred stock and contractual commitment. The Company's 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 June 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
$
1,043

 
$
—

 
$
11,547

 
$
12,590

    

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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 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 six months ended June 30, 2014 (in thousands):
 
Investment Securities
Balance, beginning of year
$
7,407

Purchases
11,362

Income accreted
461

Payments and distributions received, net
(854
)
Sales
(8,037
)
Gains on sale of investment securities
370

Gains on sales of trading securities
828

Unrealized holding gains on trading securities
101

Change in unrealized losses included in accumulated other comprehensive loss
(91
)
Balance, end of period
$
11,547

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


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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 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 June 30, 2014
 
Valuation Technique
 
Unobservable Inputs
 
Assumptions
(weighted average)
CLO securities
$
7,026

 
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
 
13.5%
 
 
 
 
 
Reinvestment spread
 
200-450 basis points
 
 
 
 
 
 
 
 
Trading securities
$
4,521

 
Net asset value
 
Discount rates
 
0% - 10%
 
 
 
Discounted cash flow
 
Constant default rate
 
2%
 
 
 
 
 
Constant prepayment rate
 
20%
 
 
 
 
 
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 June 30, 2014
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Loans and receivables from managed entities – commercial finance and real estate
$
—

 
$
—

 
$
2,250

 
$
2,250

Liability:
 

 
 

 
 

 
 

Apidos contractual commitment
$
—

 
$
—

 
$
815

 
$
815

 
 
 
 
 
 
 
 
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

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):

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

 
June 30, 2014
 
December 31, 2013
 
Carrying
Amount
 
Estimated Fair Value
 
Carrying
Amount
 
Estimated Fair Value
Assets:
 
 
 
 
 
 
 
Loans and receivables from managed entities
$
32,586

 
$
32,586

 
$
30,923

 
$
30,923

 
 
 
 
 
 
 
 
Borrowings:
 

 
 

 
 

 
 

Real estate debt
$
10,188

 
$
11,090

 
$
10,287

 
$
10,702

Senior Notes
10,000

 
13,322

 
10,000

 
12,619

Other debt
370

 
370

 
332

 
332

 
$
20,558

 
$
24,782

 
$
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 June 30, 2014 and December 31, 2013.

NOTE 17 – COMMITMENTS AND CONTINGENCIES
Limited loan guarantee. The Company, together with Lease Equity Appreciation Fund I, L.P. (“LEAF I”), one of its sponsored commercial finance investment partnerships, had provided a limited guarantee to a lender to LEAF I in exchange for a waiver of any existing defaulted loan covenants and certain future financial covenants and payment. On March 20, 2014, pursuant to the guarantee, the Company paid $954,000 to the lender on behalf of LEAF I to pay off the remaining loan balance and became subrogated to the lender's position on the loan.
On July 31, 2014, LEAF I was liquidated. In connection with that event, the Company assumed the LEAF I leases and notes, which were recorded at fair value, in payment of its outstanding loan receivable due from LEAF I. The Company will reflect a loss on this transaction of approximately $200,000 in its third quarter ending September 30, 2014.
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 June 30, 2014 and December 31, 2013, respectively.  As of June 30, 2014 and December 31, 2013, Resource Securities net capital was $1.2 million and $2.7 million, respectively, which exceeded the minimum requirements by $1.1 million and $2.5 million, respectively.
Legal proceedings. The Company is also a party to various routine legal proceedings arising out of the ordinary course of business. Management believes that none of these actions, individually or, in the aggregate, will have a material adverse effect on the Company's consolidated financial condition or operations.
Real estate commitments.  As a specialized asset manager, the Company sponsors and manages investment funds in which it may make an equity investment along with outside investors.  This equity investment is generally based on a percentage of funds raised and varies among investment programs.  With respect to Opportunity REIT II, the Company is committed to invest 1% of the first $100.0 million of equity raised. During 2013, the Company invested $200,000. In April 2014, the Company fully funded its commitment with an additional investment of $1.0 million.
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.

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

As of June 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.
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 
 June 30, 2014
 
Real
Estate
 
Financial
Fund
Management
 
Commercial
Finance
 
All
Other (1)
 
Total
RAI
 
RSO
 
Eliminations
 
Total
Consolidation
Revenues from external customers
 
$
13,674

 
$
6,826

 
$
—

 
$
—

 
$
20,500

 
$
34,608

 
$
(3,040
)
 
$
52,068

Equity in (losses) earnings of unconsolidated entities
 
(226
)
 
1,315

 
(42
)
 
—

 
1,047

 
—

 
—

 
1,047

Total revenues
 
13,448

 
8,141

 
(42
)
 
—

 
21,547

 
34,608

 
(3,040
)
 
53,115

Segment operating expenses
 
(9,105
)
 
(2,779
)
 
(123
)
 
—

 
(12,007
)
 
(19,415
)
 
2,607

 
(28,815
)
General and administrative expenses
 
(731
)
 
(445
)
 
—

 
(1,553
)
 
(2,729
)
 
—

 
—

 
(2,729
)
Reversal of (provision for) credit losses
 
7

 
—

 
(1,582
)
 
—

 
(1,575
)
 
—

 
—

 
(1,575
)
Depreciation and amortization
 
(310
)
 
(20
)
 
—

 
(135
)
 
(465
)
 
—

 
—

 
(465
)
Gain on sale of investment securities, net
 
—

 
370

 
—

 
—

 
370

 
—

 
—

 
370

Interest expense
 
(191
)
 
—

 
(9
)
 
(297
)
 
(497
)
 
—

 
—

 
(497
)
Other income (expense), net
 
111

 
555

 
—

 
(76
)
 
590

 
2,509

 
(561
)
 
2,538

Pretax income attributable to noncontrolling interests (2)
 
(84
)
 
—

 
—

 
—

 
(84
)
 
(17,405
)
 
—

 
(17,489
)
Income (loss) from continuing operations excluding noncontrolling interests before taxes
 
$
3,145

 
$
5,822

 
$
(1,756
)
 
$
(2,061
)
 
$
5,150

 
$
297

 
$
(994
)
 
$
4,453

Six Months Ended 
 June 30, 2014
 
Real
Estate
 
Financial
Fund
Management
 
Commercial
Finance
 
All
Other (1)
 
Total
RAI
 
RSO
 
Eliminations
 
Total
Consolidation
Revenues from external customers
 
$
27,304

 
$
12,816

 
$
—

 
$
—

 
$
40,120

 
$
66,539

 
$
(5,920
)
 
$
100,739

Equity in (losses) earnings of unconsolidated entities
 
(581
)
 
2,400

 
(141
)
 
—

 
1,678

 
—

 
—

 
1,678

Total revenues
 
26,723

 
15,216

 
(141
)
 
—

 
41,798

 
66,539

 
(5,920
)
 
102,417

Segment operating expenses
 
(17,980
)
 
(7,168
)
 
(226
)
 
—

 
(25,374
)
 
(32,555
)
 
5,442

 
(52,487
)
General and administrative expenses
 
(1,827
)
 
(898
)
 
—

 
(3,158
)
 
(5,883
)
 
—

 
—

 
(5,883
)
Reversal of (provision for) credit losses
 
10

 
—

 
(2,793
)
 
—

 
(2,783
)
 
—

 
—

 
(2,783
)
Depreciation and amortization
 
(618
)
 
(31
)
 
—

 
(267
)
 
(916
)
 
—

 
—

 
(916
)
Gain on sale of investment securities, net
 


 
370

 
—

 
—

 
370

 
—

 
—

 
370

Interest expense
 
(387
)
 
—

 
(9
)
 
(584
)
 
(980
)
 
—

 
—

 
(980
)
Other income (expense), net
 
367

 
1,126

 
(2
)
 
(164
)
 
1,327

 
1,178

 
(1,115
)
 
1,390

Pretax income attributable to noncontrolling interests (2)
 
(44
)
 
—

 
—

 
—

 
(44
)
 
(34,556
)
 
—

 
(34,600
)
Income (loss) from continuing operations excluding noncontrolling interests before taxes
 
$
6,244

 
$
8,615

 
$
(3,171
)
 
$
(4,173
)
 
$
7,515

 
$
606

 
$
(1,593
)
 
$
6,528


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36
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)


Three Months Ended 
 June 30, 2013
 
Real
Estate
 
Financial
Fund
Management
 
Commercial
Finance
 
All Other (1)
 
Total
RAI
 
RSO
 
Eliminations
 
Total
Consolidation
Revenues from external customers
 
$
12,484

 
$
2,196

 
$
—

 
$
—

 
$
14,680

 
$
21,647

 
$
(2,725
)
 
$
33,602

Equity in (losses) earnings of unconsolidated entities
 
(331
)
 
249

 
(35
)
 
—

 
(117
)
 
—

 
—

 
(117
)
Total revenues
 
12,153

 
2,445

 
(35
)
 
—

 
14,563

 
21,647

 
(2,725
)
 
33,485

Segment operating expenses
 
(8,896
)
 
(1,694
)
 
219

 
—

 
(10,371
)
 
(11,368
)
 
2,663

 
(19,076
)
General and administrative expenses
 
(815
)
 
(331
)
 
—

 
(1,003
)
 
(2,149
)
 
—

 
—

 
(2,149
)
Reversal of (provision for) credit losses
 
30

 
(199
)
 
(1,478
)
 
—

 
(1,647
)
 
—

 
—

 
(1,647
)
Depreciation and amortization
 
(317
)
 
(16
)
 
—

 
(156
)
 
(489
)
 
—

 
—

 
(489
)
Interest expense
 
(207
)
 
—

 
—

 
(294
)
 
(501
)
 
—

 
—

 
(501
)
Other income (expense), net
 
173

 
558

 
1

 
(92
)
 
640

 
—

 
(526
)
 
114

Pretax income attributable to noncontrolling interests (2)
 
(54
)
 
—

 
—

 
—

 
(54
)
 
(8,372
)
 
—

 
(8,426
)
Income (loss) from continuing operations excluding noncontrolling interests before taxes
 
$
2,067

 
$
763

 
$
(1,293
)
 
$
(1,545
)
 
$
(8
)
 
$
1,907

 
$
(588
)
 
$
1,311


Six Months Ended 
 June 30, 2013
 
Real
Estate
 
Financial
Fund
Management
 
Commercial
Finance
 
All
Other (1)
 
Total
RAI
 
RSO
 
Eliminations
 
Total
Consolidation
Revenues from external customers
 
$
23,804

 
$
5,064

 
$
—

 
$
—

 
$
28,868

 
$
52,225

 
$
(5,425
)
 
$
75,668

Equity in (losses) earnings of unconsolidated entities
 
(311
)
 
1,668

 
(213
)
 
—

 
1,144

 
—

 
—

 
1,144

Total revenues
 
23,493

 
6,732

 
(213
)
 
—

 
30,012

 
52,225

 
(5,425
)
 
76,812

Segment operating expenses
 
(18,336
)
 
(4,222
)
 
174

 
—

 
(22,384
)
 
(27,556
)
 
5,317

 
(44,623
)
General and administrative expenses
 
(2,219
)
 
(322
)
 
—

 
(1,761
)
 
(4,302
)
 
—

 
—

 
(4,302
)
Reversal of (provision for) credit losses
 
2,552

 
(199
)
 
(4,338
)
 
—

 
(1,985
)
 
—

 
—

 
(1,985
)
Depreciation and amortization
 
(547
)
 
(36
)
 
—

 
(322
)
 
(905
)
 
—

 
—

 
(905
)
Other-than-temporary impairment on investments
 
—

 
(214
)
 
—

 
—

 
(214
)
 
—

 
—

 
(214
)
Interest expense
 
(404
)
 
—

 
(1
)
 
(590
)
 
(995
)
 
—

 
—

 
(995
)
Other income (expense), net
 
470

 
1,147

 
7

 
(239
)
 
1,385

 
—

 
(1,051
)
 
334

Pretax income attributable to noncontrolling interests (2)
 
(11
)
 
—

 
—

 
—

 
(11
)
 
(20,686
)
 
—

 
(20,697
)
Income (loss) from continuing operations excluding noncontrolling interests before taxes
 
$
4,998

 
$
2,886

 
$
(4,371
)
 
$
(2,912
)
 
$
601

 
$
3,983

 
$
(1,159
)
 
$
3,425

Segment assets
 
Real
Estate
 
Financial
Fund
Management
 
Commercial
Finance
 
All
Other (1)
 
Total
RAI
 
RSO
 
Total
Consolidation
June 30, 2014
 
$
183,279

 
$
59,959

 
$
5,469

 
$
(83,429
)
 
$
165,278

 
$
2,558,168

 
$
2,723,446

June 30, 2013
 
$
173,491

 
$
56,834

 
$
9,062

 
$
(76,203
)
 
$
163,184

 
$
2,400,757

 
$
2,563,941

 
(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.    


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37
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 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.

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38
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)

The following reflects the assets and liabilities and operations of RSO which was consolidated by the Company:
RSO Balance Sheets Detail (in thousands):
 
 
 
 
June 30, 2014
 
December 31, 2013
ASSETS (1)
 
 
 
Cash and cash equivalents
$
222,313

 
$
262,270

Restricted cash
91,215

 
63,309

Subtotal- Cash and cash equivalents
313,528

 
325,579

Investment securities, trading
8,951

 
11,558

Investment securities available-for-sale, pledged as collateral, at fair value
196,009

 
162,608

Investment securities available-for-sale, at fair value
68,494

 
52,598

Subtotal - Investments, at fair value
273,454

 
226,764

Loans, pledged as collateral and net of allowances of $6.5 million and $13.8 million ($120.8 million and $0 at fair value)
1,740,656

 
1,369,526

Loans receivable–related party net of allowance of $700,000 and $0
4,751

 
6,966

Loans held for sale
40,286

 
21,916

Subtotal - Loans, before eliminations
1,785,693

 
1,398,408

Eliminations
(558
)
 
(950
)
Subtotal - Loans
1,785,135

 
1,397,458

Property available-for-sale
29,509

 
25,346

Investment in real estate
—

 
29,778

Investments in unconsolidated entities
60,480

 
69,069

Subtotal, Investments in real estate and unconsolidated entities
89,989

 
124,193

Line items included in "other assets":
 
 
 
Linked transactions, net at fair value
13,676

 
30,066

Derivatives, at fair value
755

 
—

Interest receivable
12,028

 
8,965

Deferred tax asset
7,480

 
5,212

Principal paydown receivable
31,950

 
6,821

Intangible assets
10,771

 
11,822

Prepaid expenses
4,153

 
2,871

Other assets
15,272

 
10,726

Subtotal - Other assets, before eliminations
96,085

 
76,483

Eliminations
(23
)
 
(16
)
Subtotal - Other assets
96,062

 
76,467

Total assets (excluding eliminations)
$
2,558,749

 
$
2,151,427

Total assets (including eliminations)
$
2,558,168

 
$
2,150,461

LIABILITIES (2)
 

 
 

Borrowings ($140.2 million and $0 at fair value)
$
1,579,834

 
$
1,319,810

Eliminations
151

 
205

Subtotal Borrowings
1,579,985

 
1,320,015

Distribution payable
28,697

 
27,023

Accrued interest expense
2,063

 
1,693

Derivatives, at fair value
9,855

 
10,586

Accrued tax liability
2,389

 
1,629

Deferred tax liability
4,036

 
4,112

Accounts payable and other liabilities
9,948

 
12,650

Subtotal - Other liabilities, before eliminations
56,988

 
57,693

Eliminations
(2,646
)
 
(2,446
)
Subtotal - Other liabilities
54,342

 
55,247

Total liabilities (before eliminations)
$
1,636,822

 
$
1,377,503

Total liabilities (after eliminations)
$
1,634,327

 
$
1,375,262


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39
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)


RSO Balance Sheets Detail (in thousands):
 
 
 
 
June 30,
2014
 
December 31,
2013
(1) Assets of consolidated RSO's VIEs included in total assets above:
 
 
 
        Restricted cash
$
88,762

 
$
61,372

        Investments securities available-for-sale, pledged as collateral, at fair value
114,641

 
105,846

        Loans held for sale
1,808

 
2,376

        Loans, pledged as collateral and net of allowances of $4.9 million and $8.8 million ($120.8 million and $0 at fair value)
1,234,382

 
1,219,569

        Interest receivable
6,955

 
5,627

        Prepaid expenses
154

 
247

        Principal receivable
31,950

 
6,821

        Total assets of consolidated VIEs
$
1,478,652

 
$
1,401,858

 
 
 
 
(2) Liabilities of consolidated RSO's VIEs included in total liabilities above:
 
 
 
        Borrowings ($140.2 million and $0 at fair value)
$
1,111,314

 
$
1,070,339

        Accrued interest expense
1,295

 
918

        Derivatives, at fair value
9,071

 
10,191

        Accounts payable and other liabilities
1,958

 
1,604

        Total liabilities of consolidated VIEs
$
1,123,638

 
$
1,083,052

The following table presents detail of noncontrolling interests attributable to RSO:
 
June 30,
2014
 
December 31,
2013
Total stockholders' equity per RSO balance sheet
$
921,927

 
$
773,924

Eliminations
(29,924
)
 
(30,560
)
Noncontrolling interests attributable to RSO
$
892,003

 
$
743,364



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40
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)

RSO Income Statement Detail (in thousands):
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
REVENUES
 
 
 
 
 
 
 
Interest income:
 
 
 
 
 
 
 
Loans
$
26,219

 
$
26,184

 
$
46,448

 
$
53,996

Securities
3,391

 
3,896

 
7,395

 
7,538

Interest income − other
982

 
635

 
3,834

 
2,501

Total interest income
30,592

 
30,715

 
57,677

 
64,035

Interest expense
10,610

 
11,134

 
20,247

 
22,299

Net interest income
19,982

 
19,581

 
37,430

 
41,736

Rental income
1,507

 
5,052

 
6,659

 
11,226

Dividend income
17

 
17

 
153

 
33

Equity in net earnings (losses) of unconsolidated subsidiaries
1,762

 
72

 
3,776

 
(353
)
Fee income
2,717

 
1,527

 
5,473

 
2,937

Net realized and unrealized gains on sales of investment securities available-for-sale and loans
4,261

 
2,394

 
7,941

 
2,785

Net realized and unrealized (loss) gain on investment securities, trading
(650
)
 
(1,751
)
 
(2,210
)
 
(635
)
Unrealized gain (loss) and net interest income on linked transactions, net
5,012

 
(5,245
)
 
7,317

 
(5,504
)
Revenues from consolidated VIE - RSO
34,608

 
21,647

 
66,539

 
52,225

OPERATING EXPENSES
 

 
 

 
 
 
 
Management fees − related party
3,314

 
2,915

 
6,394

 
5,893

Equity compensation − related party
2,032

 
2,155

 
3,699

 
5,746

Rental operating expense
1,077

 
3,624

 
4,473

 
7,561

General and administrative
11,896

 
2,382

 
20,001

 
5,863

Depreciation and amortization
760

 
999

 
1,596

 
2,137

Income tax expense
(446
)
 
1,737

 
(430
)
 
3,499

Net impairment losses recognized in earnings
—

 
535

 
—

 
556

(Benefit) provision for loan losses
782

 
(1,242
)
 
(3,178
)
 
(200
)
Total operating expenses
19,415

 
13,105

 
32,555

 
31,055

Reclassification of income tax expense
446

 
(1,737
)
 
430

 
(3,499
)
Expenses of consolidated VIE - RSO
19,861

 
11,368

 
32,985

 
27,556

Adjusted operating income
14,747

 
10,279

 
33,554

 
24,669

OTHER REVENUE (EXPENSE)
 

 
 

 
 
 
 
Gain on sale of real estate
3,042

 
—

 
3,042

 
—

Other expense
—

 
—

 
(1,262
)
 
—

Loss on the reissuance of debt
(533
)
 
—

 
(602
)
 
—

Other expense, net, from consolidated VIE - RSO
2,509

 
—

 
1,178

 
—

Income from continuing operations
17,256

 
10,279

 
34,732

 
24,669

Income tax provision - RSO
(446
)
 
1,737

 
(430
)
 
3,499

NET INCOME
17,702

 
8,542

 
35,162

 
21,170

Net income allocated to preferred shares
(3,358
)
 
(1,800
)
 
(5,758
)
 
(3,111
)
Net income allocated to noncontrolling interests
333

 
(209
)
 
389

 
—

NET INCOME ALLOCABLE TO RSO COMMON SHAREHOLDERS
$
14,677

 
$
6,533

 
$
29,793

 
$
18,059




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41
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)




RSO Cash Flow Detail (in thousands)
Six Months Ended
 
June 30,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
35,162

 
$
21,170

Items included in "Change in cash attributable to consolidated VIE - RSO":
 
 
 
Provision for loan losses
(3,178
)
 
(200
)
Depreciation of investments in real estate and other
1,635

 
1,202

Amortization of intangible assets
1,024

 
996

Amortization of term facilities
—

 
495

Accretion of net discounts on loans held for investment
(1,310
)
 
(6,930
)
Accretion of net discounts on securities available-for-sale
(1,637
)
 
(1,430
)
Amortization of discounts on convertible notes
659

 
—

Amortization of discount on notes securitization
41

 
1,772

Amortization of debt issuance costs on notes securitization
1,510

 
1,965

Amortization of stock-based compensation
3,698

 
5,746

Amortization of terminated derivative instruments
142

 
193

Accretion of interest-only available-for-sales securities
(339
)
 
(485
)
Deferred income tax benefits
(689
)
 
(115
)
Change in mortgage loans held for sale, net
(12,162
)
 
—

Purchase of securities, trading
—

 
(10,044
)
Principal payments on securities, trading
50

 
3,272

Proceeds from sales of securities, trading
379

 
18,713

Net realized and unrealized loss on investment securities, trading
2,210

 
635

Net realized gains on sales of investment securities available-for-sale and loans
(2,148
)
 
(2,785
)
Loss on reissuance of debt
602

 
—

Gain on sale of real estate
(3,042
)
 
—

Net impairment losses recognized in earnings
—

 
548

      Linked transactions fair value adjustments
(5,923
)
 
6,385

      Equity in net (earnings) losses of unconsolidated subsidiaries
(3,776
)
 
353

Change in operating assets and liabilities, net of acquisitions
980

 
5,283

Subtotal - consolidated VIE - RSO operating activity
(21,274
)
 
25,569

Change in consolidated VIE - RSO cash for the period
39,957

 
(83,124
)
Subtotal - Change in cash attributable to consolidated VIE - RSO before eliminations
18,683

 
(57,555
)
Elimination of intercompany activity
(54
)
 
(654
)
Subtotal - Adjustments to reconcile net income and operating cash flows to net income of consolidated VIE - RSO
18,629

 
(58,209
)
Net cash provided by operating activities (excluding eliminations)
13,888

 
46,739


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42
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)

 
Six Months Ended
 
June 30,
 
2014
 
2013
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Purchase of loans
(489,800
)
 
(377,679
)
Purchase of securities available-for-sale
(107,339
)
 
(96,031
)
Subtotal - Purchase of loans and securities by consolidated VIE - RSO, before eliminations
(597,139
)
 
(473,710
)
Principal payments received on loans
196,973

 
386,686

Proceeds from sale of loans
44,024

 
170,450

Principal payments on securities available-for-sale
25,774

 
20,040

Proceeds from sale of securities available-for-sale
99,151

 
7,025

Subtotal - principal payments and proceeds from sales received by consolidated VIE - RSO, before eliminations
365,922

 
584,201

Decrease (increase) in restricted cash
10,543

 
(5,926
)
Items included in "Other -VIE, investing activity":
 
 
 
Proceeds from (investment in) unconsolidated entity
8,911

 
(15,534
)
Acquisition of Moselle CLO S.A.
(30,433
)
 
—

Proceeds from sale of real estate held-for-sale
31,202

 
—

Improvement of real estate held-for-sale
—

 
(404
)
Distributions from investments in real estate
—

 
522

Improvements in investments in real estate
252

 
(365
)
Investment in loans - related parties
(244
)
 
—

Principal payments received on loans – related parties
1,759

 
362

Purchase of furniture and fixtures
(69
)
 
—

Acquisition of property and equipment
(332
)
 
—

Subtotal - Other consolidated VIE - investing activity, before eliminations
11,046

 
(15,419
)
Eliminations
(391
)
 
—

Subtotal - Other consolidated VIE - investing activity
10,655

 
(15,419
)
Net cash (used in) provided by investing activities (excluding eliminations)
(209,628
)
 
89,146

 
 
 
 

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43
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)

 
Six Months Ended
 
June 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
175,738

 
104,325

Warehouse agreement
43,000

 
—

   Reissuance of debt
16,502

 
—

Payments on borrowings:
 
 
 
Collateralized debt obligations
(152,556
)
 
(286,962
)
Warehouse agreement
(33,719
)
 
—

Subtotal - net (repayments) borrowings of debt by consolidated VIE - RSO
48,965

 
(182,637
)
Distributions paid on common stock
(51,457
)
 
(43,665
)
Elimination of dividends paid to RAI
1,144

 
1,123

Distribution paid on common stock, after elimination
(50,313
)
 
(42,542
)
Net proceeds from issuances of common stock (net of offering costs of $0 and $4,265)
—

 
114,018

Net proceeds from dividend reinvestment and stock purchase plan (net of offering costs of $0 and $19)
14,554

 
18,164

Proceeds from issuance of 8.5% Series A redeemable
preferred shares (net of offering costs of $167 and $0)
7,697

 
—

Proceeds from issuance of 8.25% Series B redeemable
preferred shares (net of offering costs of $525 and $707)
25,253

 
47,644

Proceeds from issuance of 8.625% Series C redeemable
preferred shares (net of offering costs of $4,186 and $0)
115,815

 
—

Subtotal - net proceeds from issuance of stock by consolidated VIE
163,319

 
179,826

Payment of debt issuance costs
(8
)
 
(1,178
)
Settlement of derivative instruments
442

 
—

Payment of equity to third party sub-note holders
(799
)
 
(2,661
)
Distributions paid on preferred stock
(4,679
)
 
(2,446
)
Subtotal - Other consolidated VIE - RSO financing activity, before elimination
(5,044
)
 
(6,285
)
Eliminations
—

 
—

Subtotal - Other consolidated VIE - RSO financing activity after elimination
(5,044
)
 
$
(6,285
)
Net cash provided by (used in) financing activities (excluding eliminations)
$
155,783

 
$
(52,761
)
Net (decrease) increase in cash and cash equivalents
(39,957
)
 
83,124

Cash and cash equivalents, beginning of year
262,270

 
85,278

Cash and cash equivalents, end of period
$
222,313

 
$
168,402

 
 
 
 
Supplemental disclosure:
 

 
 

  Interest expense paid in cash
$
17,438

 
$
20,214

  Income taxes paid in cash
$
3,249

 
$
9,113



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44
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)

A.
Summary of Significant Accounting Policies - RSO
Investment Securities
RSO classifies its investment portfolio as trading or available-for-sale.  RSO, from time to time, may sell any of its investments due to changes in market conditions or in accordance with its investment strategy.
RSO’s investment securities, trading and investment securities available-for-sale are reported at fair value. To determine fair value, RSO uses an independent third-party valuation firm utilizing data available in the market as well as market participating assumptions with regard to other data such as prepayment, default, and recovery rates. These valuations are validated utilizing dealer quotes or bids. If the difference between the value indicated by the third-party valuation firm and the dealer quote or bid is over a pre-determined threshold, RSO will evaluate the difference which could result in an updated valuation from the third-party or a revised dealer quote. Based on a prioritization of inputs used in valuation of each position, RSO categorizes these investments as either Level 2 or Level 3 in the fair value hierarchy. Any changes in fair value to RSO's investment securities, trading are recorded in RSO's consolidated statements of income as net realized and unrealized (loss) gain on investment securities, trading. Any changes in fair value to RSO's investment securities available-for-sale are recorded in RSO's consolidated balance sheets as a component of accumulated other comprehensive income (loss) in stockholders' equity.
On a quarterly basis, RSO evaluates its available-for-sale investments for other-than-temporary impairment.  An available-for-sale investment is impaired when its fair value has declined below its amortized cost basis.  An impairment is considered other-than-temporary when the amortized cost basis of the investment or some portion thereof will not be recovered.  In addition, RSO’s intent to sell as well as the likelihood that RSO will be required to sell the security before the recovery of the amortized cost basis is considered.  Where credit quality is believed to be the cause of the other-than-temporary impairment, that component of the impairment is recognized as an impairment loss in RSO's consolidated statements of income.  Where other market components are believed to be the cause of the impairment, that component of the impairment is recognized as other comprehensive loss.
RSO performs an on-going review of third-party reports and updated financial data on the underlying properties in order to analyze current and projected security performance. Rating agency downgrades are considered with respect to RSO's income approach when determining other-than-temporary impairment and, when inputs are subjected to testing for economic changes within possible ranges, the resulting projected cash flows reflect a full recovery of principal and interest indicating no impairment.
The determination of other than temporary impairment is a subjective process, and different judgments and assumptions could affect the timing of loss realization. The company reviews its portfolios and makes other-than temporary impairment determinations at least quarterly. The Company considers the following factors when determining if there is an other-than temporary impairment on a security:
•
the length of time the market value has been less than amortized cost;
•
the severity of the impairment;
•
the expected loss of the security as generated by a third-party valuation model;
•
original and current credit ratings from the rating agencies;
•
underlying credit fundamentals of the collateral backing the securities;
•
whether, based upon RSO's intent, it is more likely than not that RSO will sell the security before the recovery of the amortized cost basis; and
•
third-party support for default, for recovery, prepayment speed and reinvestment price assumptions.
Investment security transactions are recorded on the trade date. Realized gains and losses on investment securities are determined on the specific identification method.
Investment Interest Income Recognition
Interest income on RSO’s mortgage-backed and other asset-backed securities is accrued using the effective yield method based on the actual coupon rate and the outstanding principal amount of the underlying mortgages or other assets.  Premiums and discounts are amortized or accreted into interest income over the lives of the securities also using the effective yield method, adjusted for the effects of estimated prepayments.  For an investment purchased at par, the effective yield is the contractual interest rate on the investment.  If the investment is purchased at a discount or at a premium, the effective yield is computed based on the contractual interest rate increased for the accretion of a purchase discount or decreased for the amortization of a purchase premium.  The effective yield method requires RSO to make estimates of future prepayment rates for its investments that can be contractually prepaid before their contractual maturity date so that the purchase discount can be accreted, or the purchase premium

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45
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)

can be amortized, over the estimated remaining life of the investment.  The prepayment estimates that RSO uses directly impact the estimated remaining lives of its investments.  Actual prepayment estimates are reviewed as of each quarter end or more frequently if RSO becomes aware of any material information that would lead it to believe that an adjustment is necessary.  If prepayment estimates are incorrect, the amortization or accretion of premiums and discounts may have to be adjusted, which would have an impact on future income.
Allowance for Loan Loss
RSO maintains an allowance for loan loss. For RSO's bank and CRE loan portfolios, loans held for investment are first individually evaluated for impairment to determine whether a specific reserve is required. Loans that are not determined to be impaired individually are then evaluated for impairment as a homogeneous pool of loans with substantially similar characteristics so that a general reserve can be established, if needed.  The reviews are performed at least quarterly.
RSO considers a loan to be impaired if one of two conditions exists.  The first condition is if, based on current information and events, management believes it is probable that RSO will be unable to collect all amounts due according to the contractual terms of the loan agreement.  The second condition is if the loan is deemed to be a troubled-debt restructuring (“TDR”) where a concession has been given to a borrower in financial difficulty.  These TDRs may not have an associated specific loan loss allowance if the principal and interest amount is considered recoverable based on current market conditions, expected collateral performance and/or guarantees made by the borrowers.
When a loan is impaired under either of these two conditions, the allowance for loan losses is increased by the amount of the excess of the amortized cost basis of the loan over its fair value.  Fair value may be determined based on the present value of estimated cash flows; on market price, if available; or on the fair value of the collateral less estimated disposition costs.  When a loan, or a portion thereof, is considered uncollectible and pursuit of collection is not warranted, RSO will record a charge-off or write-down of the loan against the allowance for loan losses.
An impaired loan may remain on accrual status during the period in which RSO is pursuing repayment of the loan; however, the loan would be placed on non-accrual status at such time as (i) RSO's management believes that scheduled debt service payments will not be met within the coming 12 months; (ii) the loan becomes 90 days delinquent; (iii) RSO's management determines the borrower is incapable of, or has ceased efforts toward, curing the cause of the impairment; or (iv) the net realizable value of the loan’s underlying collateral approximates RSO’s carrying value for such loan.  While on non-accrual status, RSO recognizes interest income only when an actual payment is received. When a loan is placed on non-accrual, previously accrued interest is reversed from interest income.
Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. RSO's management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impaired loans are initially written down to fair value. They are re-measured on a nonrecurring basis. The fair value is determined using unobservable inputs including estimates of selling costs (Level 3).
For RSO's residential mortgage loans, the allowance is based upon management's review of the collectability of the loans in light of historical experience, the nature and amount of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general components. For loans that are identified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan are lower than the carrying value of that loan. A general component is maintained to cover uncertainties that could affect RSO management's estimate of probable losses. The general component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
Investments in Real Estate
Investments in real estate are carried net of accumulated depreciation.  Costs directly related to the acquisition are expensed as incurred.  Ordinary repairs and maintenance which are not reimbursed by the tenants are expensed as incurred.  Costs related to the improvement of the real property are capitalized and depreciated over their useful lives.


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46
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)

Acquisitions of real estate assets and any related intangible assets are recorded initially at fair value under ASC Topic 805, “Business Combinations.”  RSO allocates the purchase price of its investments in real estate to land, building, site improvements, the value of in-place leases and the value of above or below market leases. The value allocated to above or below market leases is amortized over the remaining lease term as an adjustment to rental income. RSO amortizes the value allocated to in-place leases over the weighted average remaining lease term to depreciation and amortization expense.  RSO depreciates real property using the straight-line method over the estimated useful lives of the assets as follows:
Category
Term
Building
25 - 40 years
Site improvements
Lesser of the remaining life of building or useful lives
Long-Lived and Intangible Assets
Long-lived assets and certain identifiable intangibles to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.  The review of recoverability is based on an estimate of the future undiscounted cash flows (excluding interest charges) expected to result from the long-lived asset’s use and eventual disposition.  If impairment has occurred, the loss will be measured as the excess of the carrying amount of the asset over the fair value of the asset.
There were no impairment charges recorded with respect to RSO's investments in real estate or intangible assets during the three and six months ended June 30, 2014 and 2013.
Linked Transactions
If RSO finances the purchase of securities with repurchase agreements with the same counterparty from whom the securities are purchased and both transactions are entered into contemporaneously or in contemplation of each other, the transactions are presumed not to meet sale accounting criteria and RSO will account for the purchase of such securities and the repurchase agreement on a net basis and record a forward purchase commitment to purchase securities (each, a “Linked Transaction”) at fair value on RSO's consolidated balance sheets in the line item Linked Transactions, at fair value. Changes in the fair value of the assets and liabilities underlying the Linked Transactions and associated interest income and expense are reported as unrealized (loss) gain and net interest income on linked transactions, net on RSO's consolidated statements of income.
Reclassifications
Certain reclassifications have been made to RSO's 2013 consolidated financial statements to conform to the 2014 presentation.
B.
Variable Interest Entities - RSO
RSO has evaluated its securities, loans, investments in unconsolidated entities, liabilities to subsidiary trusts issuing preferred securities (consisting of unsecured junior subordinated notes) and its CDOs in order to determine if they qualify as VIEs. RSO monitors these investments and, to the extent it has determined that it owns a material investment in the current controlling class of securities of a particular entity, analyzes the entity for potential consolidation. RSO will continually analyze investments and liabilities, including when there is a reconsideration event, to determine whether such investments or liabilities are VIEs and whether such VIE should be consolidated.
Consolidated VIEs (RSO is the primary beneficiary)
Based on RSO management’s analysis, RSO is the primary beneficiary of nine VIEs at June 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 and Moselle CLO. In performing the primary beneficiary analysis for seven of these VIEs (other than Whitney CLO I and Moselle CLO, which are discussed below), it was determined that the parties that have the power to direct the activities that are most significant to each of these VIEs and 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 to each such VIE considering the design of the VIE, the principal-agency relationship between RSO and other members of the related-party group, and the relationship and significance of the activities of the VIE to RSO compared to the other members of the related-party group.

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47
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)

Except for Whitney CLO I and Moselle CLO, these securitizations 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. The Manager manages these entities on behalf of RSO. By financing these assets with long-term borrowings through the issuance of bonds, RSO seeks to generate attractive risk-adjusted equity returns and to match the term of its assets and liabilities. The primary beneficiary determination for each of these VIEs was made at each VIE’s inception and is continually assessed.
Moselle CLO is a European securitization in which RSO purchased a $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.
Whitney CLO I is a securitization in which RSO acquired rights to manage the collateral assets held by the entity in February 2011. For a discussion on the primary beneficiary analysis for Whitney, see “- Unconsolidated VIEs - Resource Capital Asset Management,” below. For a discussion of RSO’s securitizations, see “Borrowings” below.
For CLOs in which RSO does not own 100% of the subordinated notes, RSO imputes an interest rate using expected cash flows over the life of the CLO and records the third party's share of the cash flows as interest expense on the consolidated statements of income.
RSO has exposure to losses on its securitizations to the extent of its subordinated debt and preferred equity interests in them. RSO is entitled to receive payments of principal and interest on the debt securities it holds and, to the extent revenues exceed debt service requirements and other expenses of the securitizations, distributions with respect to its preferred equity interests. As a result of consolidation, debt and equity interests RSO holds in these securitizations have been eliminated, and RSO’s consolidated balance sheets reflects both the assets held and debt issued by the securitizations to third parties and any accrued expense to third parties. RSO's operating results and cash flows include the gross amounts related to the securitizations' assets and liabilities as opposed to RSO's net economic interests in the securitizations. Assets and liabilities related to the securitizations are disclosed, in the aggregate, on RSO's consolidated balance sheets.
The creditors of RSO’s nine consolidated VIEs have no recourse to the general credit of RSO. However, in its capacity as manager, RSO has voluntarily supported two credits in one of its commercial real estate CDOs as the credits went through a restructuring in order to maximize their future cash flows. For the three and six months ended June 30, 2014 RSO has provided financial support of $10,000 and $549,000, respectively. For the three and six months ended June 30, 2013, RSO has provided financial support of $688,000 and $1.9 million, respectively. RSO has provided no other financial support to any other of its VIEs nor does it have any requirement to do so, although it may choose to do so in the future to maximize future cash flows on such investments by RSO. There are no explicit arrangements that obligate RSO to provide financial support to any of its consolidated VIEs, although RSO may choose to do so in the future.
The following table shows the classification and carrying value of assets and liabilities of consolidated VIEs as of June 30, 2014 (in thousands):

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48
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)

 
Apidos I
 
Apidos
III
 
Apidos
Cinco
 
Apidos
VIII
 
Whitney
CLO I
 
RREF
2006
 
RREF
2007
 
RCC CRE Notes 2013
 
Moselle
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted cash (1)
$
7,323

 
$
2,374

 
$
30,731

 
$
7

 
$
80

 
$
20

 
$
250

 
$
4,097

 
$
43,880

 
$
88,762

Investment securities
available-for-sale, pledged
   as collateral, at fair value
7,227

 
3,933

 
13,045

 
—

 
—

 
10,112

 
67,702

 
—

 
12,622

 
114,641

Loans, pledged as collateral
59,177

 
102,046

 
302,247

 
—

 
—

 
154,012

 
218,384

 
277,750

 
120,766

 
1,234,382

Loans held for sale
—

 
932

 
876

 
—

 
—

 
—

 
—

 
—

 
—

 
1,808

Interest receivable
(235
)
 
495

 
932

 
—

 
—

 
1,995

 
2,322

 
1,446

 
—

 
6,955

Prepaid assets
8

 
10

 
23

 
—

 
—

 
18

 
95

 
—

 
—

 
154

Principal paydown receivable
—

 
—

 
—

 
—

 
—

 
—

 
9,300

 
22,650

 
—

 
31,950

Total assets (2)
$
73,500

 
$
109,790

 
$
347,854

 
$
7

 
$
80

 
$
166,157

 
$
298,053

 
$
305,943

 
$
177,268

 
$
1,478,652

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Borrowings
$
56,922

 
$
97,458

 
$
319,639

 
$
—

 
$
—

 
$
106,029

 
$
126,004

 
$
256,807

 
$
148,455

 
$
1,111,314

Accrued interest expense
234

 
49

 
307

 
—

 
—

 
44

 
94

 
190

 
377

 
1,295

Derivatives, at fair value
—

 
—

 
—

 
—

 
—

 
1,290

 
7,781

 
—

 
—

 
9,071

Accounts payable and
   other liabilities
12

 
19

 
29

 
198

 
—

 
9

 
1

 
—

 
1,690

 
1,958

Total liabilities
$
57,168

 
$
97,526

 
$
319,975

 
$
198

 
$
—

 
$
107,372

 
$
133,880

 
$
256,997

 
$
150,522

 
$
1,123,638

 
(1)
Includes $4.3 million available for reinvestment in certain of the securitizations.
(2)
Assets of each of the consolidated VIEs may only be used to settle the obligations of each respective VIE.
Unconsolidated VIEs (RSO is not the primary beneficiary, but has a variable interest)
Based on RSO management’s analysis, RSO is not the primary beneficiary of the VIEs discussed below since it does not have both (i) the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. Accordingly, the following VIEs are not consolidated in RSO’s financial statements as of June 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.
LEAF Commercial Capital, Inc. ("LEAF")
In the November 16, 2011 formation of LEAF, in exchange for its prior interests in its lease-related investments, RSO received 31,341 shares of Series A Preferred Stock, 4,872 shares of newly issued 8% Series B Redeemable Preferred Stock and 2,364 shares of newly issued Series D Redeemable Preferred Stock, collectively representing, on a fully-diluted basis assuming conversion, a 26.7% interest in LEAF. RSO’s investment in LEAF was valued at $36.3 million based on a third-party valuation. RSO's investment in LEAF was recorded at $40.1 million and $41.0 million as of June 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.


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49
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)

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 $10.3 million and $11.2 million at June 30, 2014 and December 31, 2013, respectively. RSO recognized fee income of $1.1 million and $2.8 million for the three and six months ended June 30, 2014, respectively, and $1.5 million and $2.9 million for the three and six months ended June 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, substantially all of the assets were sold.
The following table shows the classification, carrying value and maximum exposure to loss with respect to RSO’s unconsolidated VIEs as of June 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
$
40,144

 
$
1,548

 
$
—

 
$
41,692

 
41,692

Intangible assets
—

 
—

 
10,341

 
10,341

 
10,341

Total assets
40,144

 
1,548

 
10,341

 
52,033

 
 
 
 
 
 
 
 
 
 
 
 
Borrowings
—

 
51,104

 
—

 
51,104

 
N/A

Total liabilities
—

 
51,104

 
—

 
51,104

 
N/A

 
 
 
 
 
 
 
 
 
 
Net asset (liability)
$
40,144

 
$
(49,556
)
 
10,341

 
$
929

 
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.

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50
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)

C.
Supplemental cash flow information - RSO
Supplemental disclosure of cash flow information (in thousands):
 
Six Months Ended
 
June 30,
 
2014
 
2013
Non-cash financing activities include the following:
 
 
 

Distributions on common stock declared but not paid
$
26,179

 
$
25,399

Distribution on preferred stock declared but not paid
$
4,353

 
$
1,944

Issuance of restricted stock
$
646

 
$
151

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
June 30, 2014
 
 
 
 
 
 
 
Structured notes, trading
$
8,056

 
$
2,130

 
$
(1,567
)
 
$
8,619

RMBS, trading
1,901

 
—

 
(1,569
)
 
332

Total
$
9,957

 
$
2,130

 
$
(3,136
)
 
$
8,951

 
 
 
 
 
 
 
 
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 one security during the six months ended June 30, 2014, for a realized gain of $379,000. RSO held seven and eight investment securities, trading as of June 30, 2014 and December 31, 2013.

E.
Investment securities available-for-sale - RSO
RSO pledges a portion of its CMBS as collateral against its borrowings under repurchase agreements and derivatives. CMBS that are accounted for as components of linked transactions are not reflected in the tables set forth in this note, as they are accounted for as derivatives.

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51
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)

ABS and structured notes are CLO debt securities collateralized by syndicated bank loans. The structured notes are foreign currency denominated ABS. 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
June 30, 2014
 
 
 
 
 
 
 
CMBS
$
175,983

 
$
7,074

 
$
(10,683
)
 
172,374

RMBS
30,647

 
—

 
—

 
30,647

Asset-backed securities ("ABS")
32,145

 
1,429

 
(214
)
 
33,360

Structured notes
23,203

 
1,452

 
—

 
24,655

Corporate bonds
3,360

 
107

 
—

 
3,467

Total
$
265,338

 
$
10,062

 
$
(10,897
)
 
$
264,503

 
 
 
 
 
 
 
 
December 31, 2013:
 
 
 
 
 
 
 
CMBS
$
185,178

 
$
7,570

 
$
(12,030
)
 
$
180,718

ABS
25,406

 
1,644

 
(394
)
 
26,656

Structured notes
5,369

 
—

 
—

 
5,369

Corporate bonds
2,517

 
16

 
(70
)
 
2,463

Total
$
218,470

 
$
9,230

 
$
(12,494
)
 
$
215,206

 

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
June 30, 2014
 
 
 
 
 
Less than one year
$
41,371

(1) 
$
50,628

 
3.79
%
Greater than one year and less than five years
139,526

 
133,098

 
5.01
%
Greater than five years and less than ten years
28,304

 
27,762

 
1.73
%
Greater than ten years
55,302

 
53,850

 
6.49
%
Total
$
264,503

 
$
265,338

 
4.78
%
 
 
 
 
 
 
December 31, 2013:
 

 
 

 
 

Less than one year
$
39,256

(1) 
$
40,931

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

 
141,760

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

 
25,707

 
1.10
%
Greater than ten years
9,724

 
10,072

 
7.90
%
Total
$
215,206

 
$
218,470

 
4.49
%
 
(1)
RSO expects that the maturity date of these CMBS will either be extended or the CMBS will be paid in full.
The contractual maturities of the CMBS investment securities available-for-sale range from July 2014 to December 2022.  The contractual maturities of the ABS investment securities available-for-sale range from November 2015 to August 2022. The contractual maturities of the corporate bond investment securities available-for-sale range from December 2015 to December 2019.

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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 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
 
Gross Unrealized Losses
 
Number of Securities
 
Fair Value
 
Gross Unrealized Losses
 
Number of Securities
 
Fair Value
 
Gross Unrealized Losses
 
Number of Securities
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CMBS
$
40,021

 
$
(649
)
 
28

 
$
22,249

 
$
(10,034
)
 
12

 
$
62,270

 
$
(10,683
)
 
40

ABS
827

 
(10
)
 
1

 
4,412

 
(204
)
 
8

 
5,239

 
(214
)
 
9

Corporate Bonds
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total
temporarily
impaired
securities
$
40,848

 
$
(659
)
 
29

 
$
26,661

 
$
(10,238
)
 
20

 
$
67,509

 
$
(10,897
)
 
49

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013:
 

 
 

 
 
 
 

 
 

 
 
 
 

 
 

 
 
CMBS
$
52,012

 
$
(7,496
)
 
34

 
$
14,159

 
$
(4,534
)
 
10

 
$
66,171

 
$
(12,030
)
 
44

ABS
143

 
(1
)
 
1

 
6,692

 
(393
)
 
9

 
6,835

 
(394
)
 
10

Corporate Bonds
865

 
(70
)
 
1

 
—

 
—

 
—

 
865

 
(70
)
 
1

Total
temporarily
impaired
securities
$
53,020

 
$
(7,567
)
 
36

 
$
20,851

 
$
(4,927
)
 
19

 
$
73,871

 
$
(12,494
)
 
55

The unrealized losses in the above table are considered to be temporary impairments due to market factors and are not reflective of credit deterioration.
RSO performs an on-going review of third-party reports and updated financial data on the properties underlying these securities in order to analyze current and projected security performance.  Rating agency downgrades are considered with respect to RSO’s income approach when determining other-than-than temporary impairment and, when inputs are subjected to testing for economic changes within possible ranges, the resulting projected cash flows reflect a full recovery of principal and interest indicating no impairment. During the six months ended June 30, 2014 and 2013, RSO recognized other-than-temporary impairment losses of zero and $21,000, respectively, on positions that supported RSO's CMBS investments.
The following table summarizes RSO's sales of investment securities available-for-sale, (in thousands, except number of securities):
 
Positions
Sold
 
Par Amount Sold
 
Realized Gain (Loss)
June 30, 2014
 
 
 
 
 
CMBS position
3
 
$
15,970

 
$
480

 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
CMBS position
4
 
$
14,500

 
$
466

Corporate bond position
35
 
$
34,253

 
$
(474
)

The amounts above do not include redemptions. During the three and six months ended June 30, 2014, RSO redeemed zero and one corporate bond position redeemed with a total par value of $0 and $630,000, and recognized a loss of zero and $1,000, respectively. During the three and six months ended June 30, 2013 the Company had two corporate bond positions redeemed with a total par value of $3.5 million, and a recognized loss of $11,000. During the three and six months ended June 30, 2014, RSO had one ABS position redeemed with a total par of $2.5 million, and recognized a gain of $25,500. During the three and six months ended June 30, 2013 RSO had no ABS positions redeemed.

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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 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:
 
June 30,
2014
 
December 31,
2013
CMBS
$
4,049

 
$
6,583

ABS
$
1,988

 
$
2,394

Corporate bond
$
96

 
$
(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
Multi-family 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 six months ended June 30, 2014, RSO made no acquisitions. RSO has two assets classified as property available-for-sale at June 30, 2014. RSO confirmed the intent and ability to sell its office property and multi-family property in their present condition during the three and six months ended June 30, 2014. These properties qualified for held for sale accounting treatment upon meeting all applicable criteria on or prior to June 30, 2014, at which time depreciation and amortization were ceased. As such, the assets associated with the office property and multi-family property, with a carrying value of $9.6 million and $19.8 million, are separately classified and included in property available-for sale on RSO's consolidated balance sheets at June 30, 2014. However, the anticipated sale of these properties did not qualify for discontinued operations and therefore, the operations for all periods presented continue to be classified within continuing operations on RSO's consolidated statements of income. RSO expects the sale both of these properties to close within the next six months. Pre-tax earnings recorded on the office property for the three and six months ended June 30, 2014 were losses of $9,000 and $25,000, respectively, and losses of $77,000 and $154,000 for the three and six months ended June 30, 2013, respectively. Pre-tax earnings recorded on the multifamily property for the three and six months ended June 30, 2014 were losses of $5,000 and $123,000, respectively, and earnings of $88,000 and $106,000 for the three and six months ended June 30, 2013, respectively. RSO's hotel property, which was classified as available-for-sale at March 31, 2014 and December 31, 2013, was sold during the three months ended June 30, 2014 for a gain of $3.0 million and is recorded in gain on sale of real estate on RSO's consolidated statements of income.
During the year ended December 31, 2013, RSO made no acquisitions and sold one of its multi-family properties for a gain of $16.6 million, which was recorded in gain on sale of real estate on RSO's consolidated statements of income.


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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 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) Premium (1)
 
Carrying
Value (2)
June 30, 2014
 
 
 
 
 
 
Commercial real estate loans:
 
 

 
 

 
 

Whole loans
 
$
959,569

 
$
(4,823
)
 
$
954,746

B notes
 
16,204

 
(66
)
 
16,138

Mezzanine loans
 
67,370

 
(110
)
 
67,260

Total commercial real estate loans
 
1,043,143

 
(4,999
)
 
1,038,144

Bank loans
 
709,102

 
(2,521
)
 
706,581

Residential mortgage loans, held for investment
 
2,470

 
—

 
2,470

Subtotal loans before allowances
 
1,754,715

 
(7,520
)
 
1,747,195

Allowance for loan loss
 
(6,539
)
 
—

 
(6,539
)
Total loans held for investment
 
1,748,176

 
(7,520
)
 
1,740,656

Bank loans held for sale
 
15,427

 
 
 
15,427

Residential mortgage loans held for sale
 
24,859

 
 
 
24,859

Total loans held for sale
 
40,286

 
—

 
40,286

Total loans
 
$
1,788,462

 
$
(7,520
)
 
$
1,780,942

 
 
 
 
 
 
 
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 $169,000 and $216,000 and deferred upfront fees of $112,000 and $141,000 being amortized over the life of the bank loans as of June 30, 2014 and December 31, 2013, respectively.  Amounts include loan origination fees of $4.9 million and $3.3 million and loan extension fees of $177,000 and $73,000 being amortized over the life of the commercial real estate loans as of June 30, 2014 and December 31, 2013, respectively.
(2)
Substantially all loans are pledged as collateral under various borrowings at June 30, 2014 and December 31, 2013, respectively.
At June 30, 2014 and December 31, 2013, approximately 32.6% and 39%, respectively, of RSO’s commercial real estate loan portfolio was concentrated in California; approximately 9.5% and 6.4%, respectively, in Arizona; approximately 21% and 14.6%, respectively, in Texas. At June 30, 2014 and December 31, 2013, approximately 15.3% and 15.8%, respectively, of RSO’s bank loan portfolio was concentrated in the collective industry grouping of healthcare, education and childcare. At June 30, 2014, approximately 70.2% of RSO's residential mortgage loans were originated in Georgia, 9.4% in Virginia, 7.2% in North Carolina, 4.6% in Alabama and 5.4% in Tennessee. 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.

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

At June 30, 2014, RSO’s bank loan portfolio including loans held for sale consisted of $721.3 million (net of allowance of $669,000) of floating rate loans, which bear interest ranging between the three month LIBOR plus 1.5%, and the three month LIBOR plus 13.0% with maturity dates ranging from June 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 (in thousands):
 
June 30,
2014
 
December 31,
2013
Less than one year
$
36,155

 
$
36,985

Greater than one year and less than five years
528,687

 
379,874

Five years or greater
157,166

 
145,164

 
$
722,008

 
$
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)
June 30, 2014
 
 
 
 
 
 
 
 
Whole loans, floating rate (1) (4) (5)
 
59
 
$
954,746

 
LIBOR plus 2.13% to
LIBOR plus 12.14%
 
October 2014 to
February 2019
B notes, fixed rate
 
1
 
16,138

 
8.68%
 
April 2016
Mezzanine loans, floating rate
 
1
 
15,452

 
LIBOR plus 15.32%
 
April 2016
Mezzanine loans, fixed rate (6)
 
3
 
51,808

 
0.50% to 18.71%
 
September 2014 to
September 2021
Total (2) 
 
64
 
$
1,038,144

 
 
 
 
 
 
 
 
 
 
 
 
 
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 $52.5 million and $13.7 million in unfunded loan commitments as of June 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 $5.8 million and $10.4 million as of June 30, 2014 and December 31, 2013, respectively.
(3)
Maturity dates do not include possible extension options that may be available to the borrowers.
(4)
As of June 30, 2014, floating rate whole loans includes $3.1 million and $12.0 million mezzanine components of two whole loans, which have a fixed rate of 15.0% and 12.0%, respectively.
(5)
Floating rate whole loans include a $799,000 junior mezzanine tranche of a whole loan that has a fixed rate of 10.0% as of June 30, 2014.
(6)
Fixed rate mezzanine loans include a mezzanine loan that was modified into two tranches, which both currently pay interest at 0.50%. In addition, the subordinate tranche accrues interest at LIBOR plus 18.50% which is deferred until maturity.

    

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

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
June 30, 2014
 
 
 
 
 
 
 
 
B notes
 
$
—

 
$
—

 
$
16,138

 
$
16,138

Mezzanine loans
 
5,711

 
—

 
61,549

 
67,260

Whole loans
 
—

 
—

 
954,746

 
954,746

Total (1) 
 
$
5,711

 
$
—

 
$
1,032,433

 
$
1,038,144

 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
B notes
 
$
—

 
$
—

 
$
16,205

 
$
16,205

Mezzanine loans
 
5,711

 
—

 
58,606

 
64,317

Whole loans
 
—

 
17,949

 
727,840

 
745,789

Total (1)
 
$
5,711

 
$
17,949

 
$
802,651

 
$
826,311

 
(1)
Weighted average life of commercial real estate loans assumes full exercise of extension options available to borrowers.
The following is a summary of the allocation of the allowance for loan loss with respect to RSO’s commercial real estate and bank loans (in thousands, except percentages) by asset class:
Description
 
Allowance for Loan Loss
 
Percentage of
Total Allowance
June 30, 2014
 
 
 
 
B notes
 
$
76

 
1.16%
Mezzanine loans
 
314

 
4.80%
Whole loans
 
5,454

 
83.41%
Bank loans
 
669

 
10.23%
Residential mortgage loans, held for investment
 
$
26

 
0.40%
Total
 
$
6,539

 
 
 
 
 
 
 
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 June 30, 2014, RSO had recorded an allowance for loan losses on loans held for investment of $6.5 million consisting of a $669,000 allowance on RSO’s bank loan portfolio and a $5.8 million allowance on RSO’s commercial real estate portfolio and a $26,000 allowance on the Company's residential mortgage loans.

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.
H.
Investments in unconsolidated entities - RSO
The following table shows RSO's investments in unconsolidated entities as of June 30, 2014 and December 31, 2013 and equity in net earnings (losses) of unconsolidated subsidiaries for the three months ended June 30, 2014 and 2013 (in thousands):

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

 
 
 
Balance as of
 
Balance as of
 
For the three months ended
 
For the six months ended
 
For the three months ended
 
For the six months ended
 
Ownership %
 
June 30, 2014
 
December 31, 2013
 
June 30, 2014
 
June 30, 2014
 
June 30, 2013
 
June 30, 2013
Värde Investment Partners, L.P.
7.5%
 
$
654

 
$
674

 
$
(19
)
 
$
(20
)
 
$
19

 
$
43

RRE VIP Borrower, LLC
3% to 5%
 
—

 
—

 
869

 
1,736

 
(101
)
 
(214
)
Investment in LEAF Preferred Stock
28.2%
 
40,144

 
41,016

 
(278
)
 
(872
)
 
304

 
(32
)
Investment in RCT I and II (1)
3%
 
1,548

 
1,548

 
(594
)
 
(1,184
)
 
(602
)
 
(1,195
)
Investment in Preferred Equity (2)
various
 
—

 
8,124

 
232

 
1,300

 
86

 
170

Investment in CVC Global Opps Fund
34.4%
 
18,134

 
16,177

 
1,124

 
1,958

 
93

 
93

Investment in Life Care Funding (3)
30%
 
—

 
1,530

 
—

 
(75
)
 
(242
)
 
(242
)
Total
 
 
$
60,480

 
$
69,069

 
$
1,334

 
$
2,843

 
$
(443
)
 
$
(1,377
)
(1)
For the three months ended June 30, 2014 and 2013, these amounts are recorded in interest expense on RSO's consolidated statements of income.
(2)
For the three months ended June 30, 2014 and 2013, these amounts are recorded in interest income on loans on RSO's consolidated statements of income.
(3)
RSO began consolidating this investment during the first quarter of 2014. Ownership % represents ownership after consolidation.
In May, June and July 2013, RSO invested $15.0 million into CVC Global Credit Opportunities Fund, L.P. ("the Partnership"), a Delaware limited partnership which generally invests in assets through a master-feeder fund structure ("the Master Fund"). The General Partner of the Partnership and the Master Fund is CVC Global Credit Opportunities Fund GP, LLC, a Delaware limited liability company. The investment manager of the Partnership and the Master Fund is CVC Credit Partners, LLC ("CVC Credit Partners"). CVC Capital Partners SICAV-FIS, S.A. ("CVC"), together with its affiliates, and the Company, own a majority and a significant minority, respectively, of the investment manager. The fund pays the investment manager a quarterly management fee in advance calculated at the rate of 1.5% annually based on the balance of each limited partner's capital account. RSO's management fee was waived upon entering the agreement given that RSO is a related party of CVC Credit Partners.
In January 2013, LTCC invested $2.0 million into LCF for the purpose of originating and acquiring life settlement contracts. In February 2014, RSO invested an additional $1.4 million which resulted in the consolidation of LCF during the first quarter of 2014.
On June 19, 2012, RSO entered into a joint venture with Värde Investment Partners, LP acting as lender, to purchase two condominium developments.  RSO purchased a 7.5% equity interest in the venture. Resource Real Estate Management, LLC ("RREM") was appointed as the asset manager of the venture to perform lease review and approval, debt service collection, loan workout, foreclosure, disposition and permitting, as applicable.  RREM was also responsible for engaging third parties to perform day-to-day property management, property leasing, rent collection, maintenance, and capital improvements.  RREM received an annual asset management fee equal to 1% of outstanding contributions. No management fees were paid for the three and six months ended June 30, 2014. For the three and six months ended June 30, 2013, RSO paid RREM management fees of $10,000 and $26,000. All of the condominiums were sold as of December 31, 2013.
RSO's resulting interest from the November 16, 2011 formation of LEAF is accounted for under the equity method.
On December 1, 2009, RSO purchased a membership interest in RRE VIP Borrower, LLC (an unconsolidated VIE that holds an interest in a real estate joint venture) from the Company at book value. RREM acts as asset manager of the venture and receives a monthly asset management fee equal to 1% of the combined investment calculated as of the last calendar day of the month. For the three and six months ended June 30, 2014, RSO paid RREM management fees of $1,000 and $6,000, respectively. For the three and six months ended June 30, 2013, RSO paid RREM management fees of $8,000 and $16,000, respectively.
RSO has a 100% interest valued at $1.5 million in the common shares (3% of the total equity) in two trusts, RCT I and RCT II. RSO records its investments in RCT I and RCT II’s common shares of $774,000 each as investments in unconsolidated

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

trusts using the cost method and records dividend income upon declaration by RCT I and RCT II.  For the three and six months ended June 30, 2014, RSO recognized $594,000 and $1.2 million, respectively, of interest expense with respect to the subordinated debentures it issued to RCT I and RCT II which included $50,000 and $99,000 , respectively, of amortization of deferred debt issuance costs. For the three and six months ended and June 30, 2013, RSO recognized $602,000 and $1.2 million respectively, of interest expense with respect to the subordinated debentures it issued to RCT I and RCT II which included $48,000 and $95,000, respectively, of amortization of deferred debt issuance costs.
I.
Financing receivables - RSO
The following tables show the allowance for loan losses and recorded investments in loans for the years indicated (in thousands):
 
Commercial Real Estate Loans
 
Bank Loans
 
Residential Mortgage Loans
 
Loans Receivable-Related Party
 
Total
June 30, 2014
 
 
 
 
 
 
 
 
 
Allowance for Loan Losses:
 
 
 
 
 
 
 
 
 
Allowance for losses at January 1, 2014
$
10,416

 
$
3,391

 
$
—

 
$
—

 
$
13,807

Provision for loan loss
(4,511
)
 
607

 
26

 
700

 
(3,178
)
Loans charged-off
(61
)
 
(3,329
)
 
—

 
—

 
(3,390
)
Allowance for losses at June 30, 2014
$
5,844

 
$
669

 
$
26

 
$
700

 
$
7,239

Ending balance:
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
1,800

 
$
441

 
$
—

 
$
700

 
$
2,941

Collectively evaluated for impairment
$
4,044

 
$
228

 
$
26

 
$
—

 
$
4,298

Loans acquired with deteriorated credit quality
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans:
 

 
 

 
 

 
 

 
 

Ending balance:
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
172,583

 
$
1,566

 
$
—

 
$
5,451

 
$
179,600

Collectively evaluated for impairment (1)
$
865,561

 
$
704,806

 
$
2,470

 


 
$
1,572,837

Loans acquired with deteriorated credit quality
$
—

 
$
119

 
$
—

 
$
—

 
$
119

 
 
 
 
 
 
 
 
 
 
December 31, 2013:
 

 
 

 
 

 
 

 
 

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

 
$
9,705

 
$
—

 
$
—

 
$
17,691

Provision for loan loss
2,686

 
334

 
—

 
—

 
3,020

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

 
—

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

 
$
3,391

 
$
—

 
$
—

 
$
13,807

Ending balance:
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
4,572

 
$
2,621

 
$
—

 
$
—

 
$
7,193

Collectively evaluated for impairment
$
5,844

 
$
770

 
$
—

 
$
—

 
$
6,614

Loans acquired with deteriorated credit quality
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans:
 

 
 

 
 

 
 

 
 

Ending balance: (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 $120.8 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.

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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 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 metrics such as performance of the underlying company, liquidity, collectability of interest, enterprise valuation, default probability, ratings from rating agencies and industry dynamics in grading its bank loans.
Credit risk profiles of bank loans were as follows (in thousands):
 
Rating 1
 
Rating 2
 
Rating 3
 
Rating 4
 
Rating 5
 
Held for Sale
 
Total
As of June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank loans
$
666,578

 
$
33,999

 
$
3,551

 
$
768

 
$
1,685

 
$
15,427

 
$
722,008

 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2013
 

 
 

 
 

 
 

 
 

 
 

 
 

Bank loans
$
488,004

 
$
42,476

 
$
18,806

 
$
2,333

 
$
3,554

 
$
6,850

 
$
562,023

All of RSO’s bank loans were performing with the exception of one loan with an amortized cost of $1.6 million as of June 30, 2014. Due to the consolidation of Moselle CLO in February 2014, RSO acquired six loans with deteriorated credit quality with an amortized cost of $119,000 as of June 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 metrics such as the strength of underlying sponsorship, payment history, collectability of interest, structural credit enhancements, market trends and loan terms in grading its commercial real estate loans.
Credit risk profiles of commercial real estate loans were as follows (in thousands):
 
Rating 1
 
Rating 2
 
Rating 3
 
Rating 4
 
Held for Sale
 
Total
As of June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Whole loans
$
900,246

 
$
32,500

 
$
22,000

 
$
—

 
$
—

 
$
954,746

B notes
16,138

 
—

 
—

 
—

 
—

 
16,138

Mezzanine loans
45,460

 
21,800

 
—

 
—

 
—

 
67,260

 
$
961,844

 
$
54,300

 
$
22,000

 
$
—

 
$
—

 
$
1,038,144

 
 
 
 
 
 
 
 
 
 
 
 
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 June 30, 2014 and December 31, 2013.

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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 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 $700,000 allowance for loan loss on a related party loan due to a default on an individually significant credit in the fund 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
June 30, 2014
 

 
 

 
 
 
 
 
 
 
 
 
 
Whole loans
$
—

 
$
—

 
$
—

 
$
—

 
$
954,746

 
$
954,746

 
$
—

B notes
—

 
—

 
—

 
—

 
16,138

 
16,138

 
—

Mezzanine loans
—

 
—

 
—

 
—

 
67,260

 
67,260

 
—

Bank loans (1) (2)
—

 
—

 
1,685

 
1,685

 
720,323

 
722,008

 
—

Residential mortgage loans (3)
—

 
—

 
266

 
266

 
27,063

 
27,329

 
—

Loans receivable-related party
—

 
—

 
—

 
—

 
5,451

 
5,451

 
—

Total loans
$
—

 
$
—

 
$
1,951

 
$
1,951

 
$
1,790,981

 
$
1,792,932

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 $4.8 million with a fair value of $119,000 at June 30, 2014.

(2) Contains $15.4 million and $6.9 million of bank loans held for sale at June 30, 2014 and December 31, 2013, respectively.

(3) Contains $24.9 million and $15.1 million of residential mortgage loans held for sale at June 30, 2014 and December 31, 2013, respectively.

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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 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
June 30, 2014
 
 
 
 
 
 
 
 
 
Loans without a specific valuation allowance:
 
 
 
 
 
 
 
 
 
Whole loans
$
127,511

 
$
127,511

 
$
—

 
$
126,070

 
$
10,682

B notes
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Mezzanine loans
$
38,072

 
$
38,072

 
$
—

 
$
38,072

 
$
2,229

Bank loans
$
119

 
$
119

 
$
—

 
$
119

 
$
—

Residential mortgage loans
$
2,470

 
$
2,470

 
$
—

 
$
2,470

 
$
65

Loans receivable - related party
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans with a specific valuation allowance:
 

 
 

 
 

 
 

 
 

Whole loans
$
7,000

 
$
7,000

 
$
(1,800
)
 
$
7,000

 
$
591

B notes
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Mezzanine loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Bank loans
$
1,566

 
$
1,566

 
$
(441
)
 
$
1,566

 
$
—

Residential mortgage loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans receivable - related party
$
4,657

 
$
4,657

 
$
(700
)
 
$
5,195

 
$
85

 
 
 
 
 
 
 
 
 
 
Total:
 

 
 

 
 

 
 

 
 

Whole loans
$
134,511

 
$
134,511

 
$
(1,800
)
 
$
133,070

 
$
11,273

B notes
—

 
—

 
—

 
—

 
—

Mezzanine loans
38,072

 
38,072

 
—

 
38,072

 
2,229

Bank loans
1,685

 
1,685

 
(441
)
 
1,685

 
—

Residential mortgage loans
2,470

 
2,470

 
—

 
2,470

 
65

Loans receivable - related party
4,657

 
4,657

 
(700
)
 
5,195

 
85

 
$
181,395

 
$
181,395

 
$
(2,941
)
 
$
180,492

 
$
13,652

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

 
 

 
 

 
 

 
 

Loans without a specific valuation allowance:
 

 
 

 
 

 
 

 
 

Whole loans
$
130,759

 
$
130,759

 
$
—

 
$
123,495

 
$
8,439

B notes
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Mezzanine loans
$
38,072

 
$
38,072

 
$
—

 
$
38,072

 
$
1,615

Bank loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Residential mortgage loans
$
315

 
$
268

 
$
—

 
$
—

 
$
—

Loans receivable - related party
$
5,733

 
$
5,733

 
$
—

 
$
—

 
$
—

Loans with a specific valuation allowance:
 

 
 

 
 

 
 

 
 

Whole loans
$
25,572

 
$
25,572

 
$
(4,572
)
 
$
24,748

 
$
1,622

B notes
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Mezzanine loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Bank loans
$
3,554

 
$
3,554

 
$
(2,621
)
 
$
—

 
$
—

Residential mortgage loans
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans receivable - related party
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
Total:
 

 
 

 
 

 
 

 
 

Whole loans
$
156,331

 
$
156,331

 
$
(4,572
)
 
$
148,243

 
$
10,061

B notes
—

 
—

 
—

 
—

 
—

Mezzanine loans
38,072

 
38,072

 
—

 
38,072

 
1,615

Bank loans
3,554

 
3,554

 
(2,621
)
 
—

 
—

Residential mortgage loans
315

 
268

 
—

 
—

 
—

Loans receivable - related party
5,733

 
5,733

 
—

 
—

 
—

 
$
204,005

 
$
203,958

 
$
(7,193
)
 
$
186,315

 
$
11,676


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

Troubled- Debt Restructurings
RSO had no troubled-debt restructurings during the three months ended June 30, 2014 and 2013 or during the six months ended June 30, 2014.
The following tables show troubled-debt restructurings in RSO's loan portfolio during the six months ended June 30, 2013 (in thousands):
 
Number
of Loans
 
Pre-Modification
Outstanding
Recorded Balance
 
Post-Modification
Outstanding
Recorded Balance
Six Months Ended June 30, 2013
 
 
 
 
 
Whole loans
2
 
$
56,328

 
$
56,328

B notes
—
 
—

 
—

Mezzanine loans
—
 
—

 
—

Bank loans
—
 
—

 
—

Residential mortgage loans
—
 
—

 
—

Loans receivable
1
 
6,592

 
6,592

Total loans
3
 
$
62,920

 
$
62,920

As of June 30, 2014 and 2013, there were no troubled-debt restructurings that subsequently defaulted.
J.
Intangible assets - RSO
Intangible assets represent identifiable intangible assets acquired as a result of RSO’s acquisition of RCAM in February 2011, its conversion of loans to investments in real estate in June 2011, and the acquisition of real estate in August 2011.  RSO amortizes identified intangible assets to expense over their estimated lives or period of benefit using the straight-line method.  RSO evaluates intangible assets for impairment as events and circumstances change.  In October 2012, RSO purchased 66.6% of the preferred equity of, and began consolidating, Whitney CLO I, one of the RCAM CLOs. As a result of this transaction and the consolidation of Whitney CLO I, RSO wrote-off the unamortized balance of $2.6 million, the intangible asset associated with this CLO, which was recorded in gain (loss) on consolidation in RSO's consolidated statement of income during the year ended December 31, 2012. In May 2013, RSO purchased additional equity, increasing its ownership percentage to 68.3% before the CLO was later substantially liquidated in October 2013. Due to an event whereby a second CLO liquidated in early 2013, RSO accelerated the amortization of the remaining balance of its intangible asset and recorded a $657,000 charge to depreciation and amortization on RSO's consolidated statement of income during the year ended December 31, 2012. Upon acquisition of Primary Capital Mortgage, LLC ("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 expects to record amortization expense on intangible assets of approximately $2.1 million for the year ended December 31, 2014, $2.0 million for the year ended December 31, 2015, $1.8 million for the years ended December 31, 2016 and 2017 and $1.6 million for the year ended December 31, 2018.  The weighted average amortization period was 7.1 years and 7.7 years at June 30, 2014 and December 31, 2013, respectively and the accumulated amortization was $11.0 million and $12.5 million at June 30, 2014 and December 31, 2013, respectively.

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

The following table summarizes intangible assets (in thousands).
 
Asset Balance
 
Accumulated Amortization
 
Net Asset
June 30, 2014
 
 
 
 
 
Investment in RCAM
$
21,213

 
$
(10,872
)
 
$
10,341

Investment in PCM:
 
 
 
 


Wholesale or correspondent relationships
600

 
(170
)
 
430

Total intangible assets
$
21,813

 
$
(11,042
)
 
$
10,771

 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

Investment in RCAM
$
21,213

 
$
(9,980
)
 
$
11,233

Investments in real estate:
 

 
 

 
 

In-place leases
2,461

 
(2,430
)
 
31

Above (below) market leases
29

 
(29
)
 
—

Investment in PCM:
 
 
 
 
 
Wholesale or correspondent relationships
600

 
(42
)
 
558

Total intangible assets
$
24,303

 
$
(12,481
)
 
$
11,822


For the three and six months ended June 30, 2014, RSO recognized $1.1 million and $2.8 million, respectively, of fee income related to the investment in RCAM. For the three and six months ended June 30, 2013, RSO recognized $1.5 million and $2.9 million, respectively, of fee income related to the investment in RCAM.
The purchase price has been allocated to the assets acquired and liabilities assumed based upon RSO’s best estimate of fair value, with any shortage under the net tangible and intangible assets acquired allocated to gain on bargain purchase. The gain on bargain purchase resulted from the stock grant described above being accounted for as compensation under GAAP and was recorded as other income (expense) on RSO's consolidate statement of income.    
The following table sets forth the allocation of the purchase price as of December 31, 2013 (in thousands):
Assets acquired:
 
Cash and cash equivalents
$
1,233

Loans held for sale
15,021

Loans held for investment
2,071

Wholesale and correspondent relationships
600

Other assets
5,828

Total assets
24,753

 
 
Less: Liabilities assumed:
 
Borrowings
14,584

Other liabilities
2,165

Total liabilities
16,749

 
 
Gain on bargain purchase
391

Total cash purchase price
$
7,613

Although no further material purchase price adjustments for PCM 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.


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

K.
Borrowings - RSO
RSO historically has financed the acquisition of its investments, including investment securities, loans and lease receivables, through the use of secured and unsecured borrowings in the form of CDOs, CLOs securitized notes, repurchase agreements, secured term facilities, warehouse facilities and trust preferred securities issuances.  Certain information with respect to RSO’s borrowings 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
 
Date Securitization Closed
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
RREF CDO 2006-1 Senior Notes
$
106,029

 
$
51

 
$
106,080

 
1.92%
 
32.1 years
 
$
174,237

 
August 2006
RREF CDO 2007-1 Senior Notes
126,004

 
355

 
126,359

 
0.99%
 
32.3 years
 
361,432

 
June 2007
RCC CRE Notes 2013
256,807

 
3,683

 
260,490

 
2.02%
 
14.5 years
 
281,846

 
December 2013
Apidos CDO I Senior Notes 
56,922

 
—

 
56,922

 
2.24%
 
3.1 years
 
73,276

 
August 2005
Apidos CDO III Senior Notes  
97,458

 
—

 
97,458

 
1.01%
 
6.2 years
 
109,325

 
May 2006
Apidos Cinco CDO Senior Notes
319,639

 
553

 
320,192

 
0.73%
 
5.9 years
 
341,777

 
May 2007
Whitney CLO I Senior Notes (1)
—

 
—

 
—

 
—%
 
N/A
 
79

 
N/A
Moselle CLO S.A. Senior Notes, at fair value (6)
140,220

 
—

 
140,220

 
1.04%
 
5.5 years
 
175,641

 
October 2005
Moselle CLO S.A. Securitized Borrowings, at fair value
5,208

 
—

 
5,208

 
1.04%
 
N/A
 
—

 
N/A
Unsecured Junior Subordinated Debentures (2)
51,104

 
444

 
51,548

 
4.18%
 
22.3 years
 
—

 
May/Sept 2006
6.0% Convertible Senior Notes
107,550

 
7,450

 
115,000

 
6.00%
 
4.4 years
 
—

 
October 2013
CRE - Term Repurchase Facilities (3) 
217,679

 
448

 
218,127

 
2.58%
 
17 days
 
315,579

 
N/A
CMBS - Term Repurchase Facility (4)
30,833

 
—

 
30,833

 
1.37%
 
18 days
 
37,784

 
N/A
RMBS- Term Repurchase Facility (5)
22,997

 
28

 
23,025

 
1.15%
 
1 day
 
27,669

 
N/A
Residential Mortgage Financing Agreements
23,679

 
—

 
23,679

 
3.99%
 
130 days
 
32,399

 
N/A
CMBS - Short Term Repurchase Agreements
17,705

 
—

 
17,705

 
1.40%
 
2 days
 
20,813

 
N/A
Total
$
1,579,834

 
13,012

 
1,592,846

 
1.96%
 
9.8 years
 
$
1,951,857

 
 




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

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

 
$
205

 
$
94,209

 
1.87
%
 
32.6 years
 
$
169,115

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

 
719

 
178,556

 
0.84
%
 
32.8 years
 
318,933

 
June 2007
RCC CRE Notes 2013
256,571

 
4,269

 
260,840

 
2.03
%
 
15.0 years
 
305,586

 
December 2013
Apidos CDO I Senior Notes
87,131

 
—

 
87,131

 
1.68
%
 
3.6 years
 
103,736

 
August 2005
Apidos CDO III Senior Notes
133,209

 
117

 
133,326

 
0.88
%
 
6.7 years
 
145,930

 
May 2006
Apidos Cinco CDO Senior Notes
321,147

 
853

 
322,000

 
0.74
%
 
6.4 years
 
342,796

 
May 2007
Whitney CLO I Securitized Borrowings (1)
440

 
—

 
440

 
—
%
 
N/A
 
885

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

 
543

 
51,548

 
4.19
%
 
22.8 years
 
—

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

 
8,465

 
115,000

 
6.00
%
 
4.9 years
 
—

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

 
1,033

 
30,736

 
2.67
%
 
21 days
 
48,186

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

 
12

 
47,613

 
1.38
%
 
21 days
 
56,949

 
N/A
Residential Mortgage Financing Agreements
14,627

 
—

 
14,627

 
4.24
%
 
56 days
 
16,487

 
N/A
Total
$
1,319,810

 
$
16,216

 
$
1,336,026

 
1.87
%
 
13.1 years
 
$
1,508,603

 
 
 
(1)
The securitized borrowings are collateralized by the same assets as the Apidos CLO VIII Senior Notes and the Whitney CLO I Securitized Borrowings, respectively.
(2)
Amount represents junior subordinated debentures issued to RCT I and RCT II in May 2006 and September 2006, respectively.
(3)
Amounts also include accrued interest costs of $207,000 and $26,000 related to CRE repurchase facilities as of June 30, 2014 and December 31, 2013, respectively.
(4)
Amounts also include accrued interest costs of $14,000 and $22,000 related to CMBS repurchase facilities as of June 30, 2014 and December 31, 2013, respectively. Amounts do note reflect CMBS repurchase agreement borrowings that are components of linked transactions.
(5)
Amount also includes accrued interest costs of $1,000 related to RMBS repurchase facilities as of June 30, 2014.
(6)
The fair value option has been elected for the borrowings associated with Moselle CLO S.A., as such, the outstanding borrowings and principal outstanding amounts are state at fair value. The unpaid principal amounts of these borrowings were $143 million at June 30, 2014.


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66
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 30, 2014
(unaudited)

Securitizations
RCC CRE Notes 2013
In December 2013, RSO closed RCC CRE Notes 2013, a $307.8 million CRE securitization transaction that provided financing for transitional commercial real estate loans. The investments held by CRE Notes 2013 securitized the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders. CRE Notes 2013 issued a total of $260.8 million of senior notes at par to unrelated investors. RCC Real Estate purchased 100% of the Class D senior notes (rated BBB:DBRS), Class E senior notes (rated BB:DBRS) and Class F senior notes (rated B:DBRS) for $30.0 million. In addition, RCC CRE Notes 2013 Investor, LLC, a subsidiary of RCC Real Estate, purchased a $16.9 million equity interest representing 100% of the outstanding preference shares. The senior notes purchased by RCC Real Estate are subordinated in right of payment to all other senior notes issued by CRE Notes 2013 but are senior in right of payment to the preference shares. The equity interest is subordinated in right of payment to all other securities issued by CRE Notes 2013. There is no reinvestment period for CRE Notes 2013, which will result in the sequential paydown of notes as underlying collateral matures and paydown. As of June 30, 2014, $350,000 of the Class A notes have been paid down.
At closing, the senior notes issued to investors by CRE Notes 2013 consisted of the following classes: (i) $136.9 million of Class A notes bearing interest at one-month LIBOR plus 1.30%; (ii) $78.5 million of Class A-S notes bearing interest at one-month LIBOR plus 2.15%; (iii) $30.8 million of Class B notes bearing interest at one-month LIBOR plus 2.85%; (iv) $14.6 million of Class C notes bearing interest at one-month LIBOR plus 3.50%; (v) $13.8 million of Class D notes bearing interest at one-month LIBOR plus 4.50%; (vi) $9.2 million of Class E notes bearing interest at one-month LIBOR plus 5.50%; (vii) and $6.9 million of Class F notes bearing interest at one-month LIBOR plus 6.50%. All of the notes issued mature in December 2028, although RSO has the right to call the notes anytime after January 2016 until maturity. The weighted average interest rate on all notes issued to outside investors was 2.02% at June 30, 2014.
As a result of RSO’s ownership of senior notes, the notes retained at the CRE securitization's closing eliminate in consolidation.
Resource Real Estate Funding CDO 2007-1
In June 2007, RSO closed RREF CDO 2007-1, a $500.0 million CDO transaction that provided financing for commercial real estate loans and commercial mortgage-backed securities.  The investments held by RREF CDO 2007-1 collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders.  RREF CDO 2007-1 issued a total of $265.6 million of senior notes at par to unrelated investors.  RCC Real Estate purchased 100% of the Class H senior notes (rated  BBB+:Fitch), Class K senior notes (rated BBB-:Fitch), Class L senior notes (rated BB:Fitch) and Class M senior notes (rated B: Fitch) for $68.0 million.  In addition, Resource Real Estate Funding 2007-1 CDO Investor, LLC, a subsidiary of RCC Real Estate, purchased a $41.3 million equity interest representing 100% of the outstanding preference shares.  The senior notes purchased by RCC Real Estate are subordinated in right of payment to all other senior notes issued by RREF CDO 2007-1 but are senior in right of payment to the preference shares.  The equity interest is subordinated in right of payment to all other securities issued by RREF CDO 2007-1. The reinvestment period for RREF 2007-1 ended in June 2012, which has resulted in the sequential paydown of notes as underlying collateral matures and pays down.  As of June 30, 2014, $115.6 million of Class A-1 notes have been paid down and $50.0 million of the Class A-1R notes have been paid down.
At closing, the senior notes issued to investors by RREF CDO 2007-1 consist of the following classes: (i) $180.0 million of Class A-1 notes bearing interest at one-month LIBOR plus 0.28%; (ii) $50.0 million of unissued Class A-1R notes, which allow the CDO to fund future funding obligations under the existing whole loan participations that have future funding commitments; the undrawn balance of the Class A-1R notes accrued a commitment fee at a rate per annum equal to 0.18%, the drawn balance bore interest at one-month LIBOR plus 0.32%; (iii) $57.5 million of Class A-2 notes bearing interest at one-month LIBOR plus 0.46%; (iv) $22.5 million of Class B notes bearing interest at one-month LIBOR plus 0.80%; (v) $7.0 million of Class C notes bearing interest at a fixed rate of 6.423%; (vi) $26.8 million of Class D notes bearing interest at one-month LIBOR plus 0.95%; (vii) $11.9 million of Class E notes bearing interest at one-month LIBOR plus 1.15%; (viii) $11.9 million of Class F notes bearing interest at one-month LIBOR plus 1.30%; (ix) $11.3 million of Class G notes bearing interest at one-month LIBOR plus 1.55%; (x) $11.3 million of Class H notes bearing interest at one-month LIBOR plus 2.30%; (xi) $11.3 million of Class J notes bearing interest at one-month LIBOR plus 2.95%; (xii) $10.0 million of Class K notes bearing interest at one-month LIBOR plus 3.25%; (xiii) $18.8 million of Class L notes bearing interest at a fixed rate of 7.50% and (xiv) $28.8 million of Class M notes bearing interest at a fixed rate of 8.50%.  All of the notes issued mature in September 2046, although RSO has the right to call the notes anytime after July 2017 until maturity.  The weighted average interest rate on all notes issued to outside investors and net of repurchased notes was 0.99% and 0.84% at June 30, 2014 and December 31, 2013, respectively.

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

During the six months ended June 30, 2014 and the year ended December 31, 2013, RSO did not repurchase any notes.
As a result of RSO’s ownership of senior notes, both the notes repurchased subsequent to closing and those retained at the CDO’s closing eliminate in consolidation.
Resource Real Estate Funding CDO 2006-1
In August 2006, RSO closed RREF CDO 2006-1, a $345.0 million CDO transaction that provided financing for commercial real estate loans.  The investments held by RREF CDO 2006-1 collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders.  RREF CDO 2006-1 issued a total of $308.7 million of senior notes at par to investors of which RCC Real Estate purchased 100% of the Class J senior notes (rated BB: Fitch) and Class K senior notes (rated B:Fitch) for $43.1 million.  In addition, Resource Real Estate Funding 2006-1 CDO Investor, LLC, a subsidiary of RCC Real Estate, purchased a $36.3 million equity interest representing 100% of the outstanding preference shares.  The senior notes purchased by RCC Real Estate are subordinated in right of payment to all other senior notes issued by RREF CDO 2006-1 but are senior in right of payment to the preference shares.  The equity interest is subordinated in right of payment to all other securities issued by RREF CDO 2006-1.  The reinvestment period for RREF 2006-1 ended in September 2011 which has resulted in the sequential paydown of notes as underlying collateral matures and pays down.  As of June 30, 2014, $116.9 million of Class A-1 notes have been paid down.
The senior notes issued to investors by RREF CDO 2006-1 consist of the following classes:  (i) $129.4 million of Class A-1 notes bearing interest at one-month LIBOR plus 0.32%; (ii) $17.4 million of Class A-2 notes bearing interest at one-month LIBOR plus 0.35%; (iii) $5.0 million of Class A-2 notes bearing interest at a fixed rate of 5.842%; (iv) $6.9 million of Class B notes bearing interest at one-month LIBOR plus 0.40%; (v) $20.7 million of Class C notes bearing interest at one-month LIBOR plus 0.62%; (vi) $15.5 million of Class D notes bearing interest at one-month LIBOR plus 0.80%; (vii) $20.7 million of Class E notes bearing interest at one-month LIBOR plus 1.30%; (viii) $19.8 million of Class F notes bearing interest at one-month LIBOR plus 1.60%; (ix) $17.3 million of Class G notes bearing interest at one-month LIBOR plus 1.90%; (x) $12.9 million of Class H notes bearing interest at one-month LIBOR plus 3.75%, (xi) $14.7 million of Class J notes bearing interest at a fixed rate of 6.00% and (xii) $28.4 million of Class K notes bearing interest at a fixed rate of 6.00%.  As a result of RSO’s ownership of the Class J and K senior notes, these notes eliminate in consolidation.  All of the notes issued mature in August 2046, although RSO has the right to call the notes anytime after August 2016 until maturity.  The weighted average interest rate on all notes issued to outside investors and net of repurchased notes was 1.92% and 1.87% at June 30, 2014 and December 31, 2013, respectively.
During the three months ended June 30, 2014 and the year ended December 31, 2013, RSO did not repurchase any notes.
As a result of RSO’s ownership of senior notes, both the notes repurchased subsequent to closing and those retained at the CDO’s closing eliminate in consolidation.
Moselle CLO S.A.
           In February 2014, RSO purchased 100% of the Class 1 Subordinated Notes and 67.9% of the Class 2 Subordinated Notes, which represented 88.6% of the subordinated notes in the European securitization Moselle CLO S.A. Due to RSO's economic interest combined with its contractual, unilateral kick-out rights acquired upon its purchase of a majority of the subordinate notes, RSO determined that it had a controlling financial interest and consolidated Moselle CLO.  The notes purchased by RSO are subordinated in right of payment to all other notes issued by Moselle CLO. 
               The balances of the senior notes issued to investors when RSO acquired a controlling financial interest in February 2014 were as follows: (i) €24.9 million of Class A-1E notes bearing interest at LIBOR plus 0.25%; (ii) $24.9 million of Class A-1L notes bearing interest at LIBOR  plus 0.25%; (iii) €10.3 million of Class A-1LE notes bearing interest at LIBOR  plus 0.31%; (iv) $10.3 million of Class A-1LE USD notes bearing interest at LIBOR  plus 0.31% (v) €13.8 million of Class A-2E notes bearing interest at LIBOR  plus 0.40%; (vi) $13.8 million of Class A-2L notes bearing interest at LIBOR plus 0.40%; (vii) €6.8 million of Class A-3E notes bearing interest at LIBOR plus 0.70%; (viii) $6.8 million of Class A-3L notes bearing interest at LIBOR plus 0.75%; (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 1.04% at June 30, 2014.

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

Whitney CLO I
In February 2011, RSO acquired the rights to manage the assets held by Whitney CLO I. In October 2012, RSO purchased a $20.9 million preferred equity interest at a discount of 42.5% which represented 66.6% of the outstanding preference shares in Whitney CLO I. In May 2013, RSO purchased an additional $550,000 equity interest in Whitney CLO I and as of June 30, 2014 held 68.3% of the outstanding preference shares. Based upon those purchases, RSO determined that it had a controlling interest and consolidated Whitney CLO I. The preferred equity interest was subordinated in right of payment to all other securities issued by Whitney CLO I. In 2013, RSO substantially liquidated Whitney CLO I, and as a result substantially all of the assets were sold.
Apidos CLO VIII
In October 2011, RSO closed Apidos CLO VIII, a $350.0 million CLO transaction that provides financing for bank loans.  The investments held by Apidos CLO VIII collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders.  Apidos CLO VIII issued a total of $317.6 million of senior notes at a discount of 4.4% to investors and Resource TRS III purchased a $15.0 million interest representing 43% of the outstanding subordinated debt.  The remaining 57% of subordinated debt was owned by unrelated third parties.  The reinvestment period for Apidos CLO VIII will end in October 2014.  The subordinated debt interest is subordinated in right of payment to all other securities issued by Apidos CLO VIII. In 2013, Apidos CLO VIII was called and substantially liquidated and, as a result, all of the assets were sold. Total proceeds from the sale of these assets, plus proceeds from previous sales and paydowns in the CLO, were used to paydown the notes in full.
Apidos Cinco CDO
In May 2007, RSO closed Apidos Cinco CDO, a $350.0 million CDO transaction that provides financing for bank loans.  The investments held by Apidos Cinco CDO collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders.  Apidos Cinco CDO issued a total of $322.0 million of senior notes at par to investors and RCC commercial purchased a $28.0 million equity interest representing 100% of the outstanding preference shares.  The reinvestment period for Apidos Cinco CDO ended in May 2014 which results in the sequential paydown of notes as underlying collateral matures and pays down.  The equity interest is subordinated in right of payment to all other securities issued by Apidos Cinco CDO.
The senior notes issued to investors by Apidos Cinco CDO consist of the following classes: (i) $37.5 million of Class A-1 notes bearing interest at LIBOR plus 0.24%; (ii) $200.0 million of Class A-2a notes bearing interest at LIBOR plus 0.23%; (iii) $22.5 million of Class A-2b notes bearing interest at LIBOR plus 0.32%; (iv) $19.0 million of Class A-3 notes bearing interest at LIBOR plus 0.42%; (v) $18.0 million of Class B notes bearing interest at LIBOR plus 0.80%; (vi) $14.0 million of Class C notes bearing interest at LIBOR plus 2.25% and (vii) $11.0 million of Class D notes bearing interest at LIBOR plus 4.25%. All of the notes issued mature on May 14, 2020, although RSO has the right to call the notes anytime after May 14, 2011 until maturity.  The weighted average interest rate on all notes was 0.73% and 0.74% at June 30, 2014 and December 31, 2013, respectively. As of June 30, 2014, $45,000 of Class A-1 notes and $264,000 of Class A-2A notes have been paid down.
Apidos CDO III
In May 2006, RSO closed Apidos CDO III, a $285.5 million CDO transaction that provides financing for bank loans.  The investments held by Apidos CDO III collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders.  Apidos CDO III issued a total of $262.5 million of senior notes at par to investors and RCC Commercial purchased a $23.0 million equity interest representing 100% of the outstanding preference shares.  The equity interest is subordinated in right of payment to all other securities issued by Apidos CDO III.
At closing, the senior notes issued to investors by Apidos CDO III consist of the following classes:  (i) $212.0 million of Class A-1 notes bearing interest at 3-month LIBOR plus 0.26%; (ii) $19.0 million of Class A-2 notes bearing interest at 3-month LIBOR plus 0.45%; (iii) $15.0 million of Class B notes bearing interest at 3-month LIBOR plus 0.75%; (iv) $10.5 million of Class C notes bearing interest at 3-month LIBOR plus 1.75%; and (v) $6.0 million of Class D notes bearing interest at 3-month LIBOR plus 4.25%.  All of the notes issued mature on September 12, 2020, although RSO has the right to call the notes anytime after September 12, 2011 until maturity.  The weighted average interest rate on all notes was 1.01% and 0.88% at June 30, 2014 and December 31, 2013, respectively. The reinvestment period for Apidos CDO III ended in June 2012 which has resulted in the sequential pay down of notes as underlying collateral matures and pays down.  As of June 30, 2014, $165.0 million of Class A-1 notes have been paid down.

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

Apidos CDO I
In August 2005, RSO closed Apidos CDO I, a $350.0 million CDO transaction that provides financing for bank loans.  The investments held by Apidos CDO I collateralize the debt it issued and, as a result, the investments are not available to RSO, its creditors or stockholders.  Apidos CDO I issued a total of $321.5 million of senior notes at par to investors and RCC Commercial purchased a $28.5 million equity interest representing 100% of the outstanding preference shares.  The equity interest is subordinated in right of payment to all other securities issued by Apidos CDO I.
At closing, the senior notes issued to investors by Apidos CDO I consist of the following classes:  (i) $265.0 million of Class A-1 notes bearing interest at 3-month LIBOR plus 0.26%; (ii) $15.0 million of Class A-2 notes bearing interest at 3-month LIBOR plus 0.42%; (iii) $20.5 million of Class B notes bearing interest at 3-month LIBOR plus 0.75%; (iv) $13.0 million of Class C notes bearing interest at 3-month LIBOR plus 1.85%; and (v) $8.0 million of Class D notes bearing interest at a fixed rate of 9.25%.  All of the notes issued mature on July 27, 2017, although RSO has the right to call the notes anytime after July 27, 2010 until maturity.  The weighted average interest rate on all notes was 2.24% and 1.68% and at June 30, 2014 and December 31, 2013, respectively. The reinvestment period for Apidos CDO I ended in July 2011 which has resulted in the sequential pay down of notes as underlying collateral matures and pays down.  As of June 30, 2014, $262.6 million of Class A-1 Notes have been paid down.
During the three and six months ended June 30, 2014 and the year ended December 31, 2013, RSO did not repurchase any notes.
6.0% Convertible Senior Notes
On October 21, 2013, RSO issued and sold in a public offering $115.0 million aggregate principal amount of its 6.0% Convertible Senior Notes due in 2018, ("6.0% Convertible Senior Notes"). After deducting the underwriting discount and the estimated offering costs, RSO received approximately $111.1 million of net proceeds. The discount of $4.9 million on the 6.0% Convertible Senior Notes reflects the difference between the stated value of the debt and the fair value of the notes as if they were issued without a conversion feature and at a higher rate of interest that RSO estimated would have been applicable without the conversion feature. The discount will be amortized on a straight-line basis as additional interest expense through maturity on December 1, 2018. Interest on the 6.0% convertible senior notes is paid semi-annually and the 6.0% Convertible Senior Notes mature on December 1, 2018. Prior to December 1, 2018, the 6.0% Convertible Senior Notes are not redeemable at RSO's option, except to preserve RSO's status as a REIT. On or after December 1, 2018, RSO may redeem all or a portion of the 6.0% Convertible Senior Notes at a redemption price equal to the principal amount plus accrued and unpaid interest. Holders of 6.0% Convertible Senior Notes may require RSO to repurchase all or a portion of the 6.0% Convertible Senior Notes at a purchase price equal to the principal amount plus accrued and unpaid interest on December 1, 2018, or upon the occurrence of certain defined fundamental changes. The 6.0% Convertible Senior Notes are convertible at the option of the holder at a current conversion rate of 150.1502 common shares per $1,000 principal amount of 6.0% Convertible Senior Notes (equivalent to a current conversion price of $6.66 per common share). Upon conversion of 6.0% Convertible Senior Notes by a holder, the holder will receive cash, RSO common shares or a combination of cash and RSO common shares, at RSO's election.
Unsecured Junior Subordinated Debentures
In May 2006 and September 2006, RSO formed RCT I and RCT II, respectively, for the sole purpose of issuing and selling capital securities representing preferred beneficial interests.  Although RSO owns $774,000 of the common securities of RCT I and RCT II, RCT I and RCT II are not consolidated into RSO’s consolidated financial statements because RSO is not deemed to be the primary beneficiary of these entities.  In connection with the issuance and sale of the capital securities, RSO issued junior subordinated debentures to RCT I and RCT II of $25.8 million each, representing RSO’s maximum exposure to loss.  The debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II are included in borrowings and are being amortized into interest expense in RSO's consolidated statements of income using the effective yield method over a ten year period.
The debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II at June 30, 2014 were $211,000 and $233,000, respectively.  The debt issuance costs associated with the junior subordinated debentures for RCT I and RCT II at December 31, 2013, were $261,000 and $282,000, respectively.  The rates for RCT I and RCT II, at June 30, 2014, were 4.18% and 4.17%, respectively.  The rates for RCT I and RCT II, at December 31, 2013, were 4.20% and 4.19%, respectively.

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

The rights of holders of common securities of RCT I and RCT II are subordinate to the rights of the holders of capital securities only in the event of a default; otherwise, the common securities’ economic and voting rights are pari passu with the capital securities.  The capital and common securities of RCT I and RCT II are subject to mandatory redemption upon the maturity or call of the junior subordinated debentures held by each.  Unless earlier dissolved, RCT I will dissolve on May 25, 2041 and RCT II will dissolve on September 29, 2041.  The junior subordinated debentures are the sole assets of RCT I and RCT II, mature on September 30, 2036 and October 30, 2036, respectively, and may be called at par by RSO any time after September 30, 2011 and October 30, 2011, respectively.  RSO records its investments in RCT I and RCT II’s common securities of $774,000 each as investments in unconsolidated entities and records dividend income upon declaration by RCT I and RCT II.
Repurchase and Credit Facilities
Borrowings under the repurchase and mortgage finance facilities agreements were guaranteed by RSO or one of its subsidiaries. The following table sets forth certain information with respect to RSO's borrowings is summarized in the following table (dollars in thousands):
 
June 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)
$
30,833

 
$
37,784

 
47
 
1.37%
 
$
47,601

 
$
56,949

 
44
 
1.38%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CRE Term Repurchase Facilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo Bank (2)
202,821

 
293,496

 
12
 
2.55%
 
30,003

 
48,186

 
8
 
2.67%
Deutsche Bank AG (3)
14,858

 
22,083

 
3
 
3.03%
 
(300
)
 
—

 
—
 
—%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-Term Repurchase Agreements - CMBS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deutsche Bank Securities, LLC
17,705

 
20,813

 
6
 
1.40%
 
—

 
—

 
—
 
—%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RMBS Term Repurchase Facility
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo Bank (4)
22,997

 
27,669

 
6
 
1.15%
 
—

 
—

 
—
 
—%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Mortgage Financing Agreements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New Century Bank
14,772

 
17,519

 
78
 
3.91%
 
11,916

 
13,089

 
74
 
4.17%
ViewPoint Bank, NA
8,907

 
14,880

 
48
 
4.12%
 
2,711

 
3,398

 
17
 
4.58%
Totals
$
312,893

 
$
434,244

 
 
 
 
 
$
91,931

 
$
121,622

 
 
 
 
 
(1)
The Wells Fargo CMBS term facility borrowing includes zero and $12,000 of deferred debt issuance costs as of June 30, 2014 and December 31, 2013, respectively.
(2)
The Wells Fargo CRE term repurchase facility borrowing includes $419,000 and $732,000 of deferred debt issuance costs as of June 30, 2014 and December 31, 2013, respectively.
(3)
The Deutsche Bank term repurchase facility includes $29,000 and $300,000 of deferred debt issuance costs as of June 30, 2014 and December 31, 2013, respectively.
(4)
The Wells Fargo RMBS term repurchase facility includes $28,000 of deferred debt issuance costs as of June 30, 2014.
    

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71
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 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.
 
June 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
$
5,959

 
$
7,750

 
7
 
1.63%
 
$
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
4,183

 
6,309

 
7
 
1.37%
 
21,969

 
30,803

 
9
 
1.19%
Deutsche Bank Securities, LLC
18,584

 
28,211

 
15
 
1.41%
 
18,599

 
29,861

 
9
 
1.43%
Totals
$
28,726

 
$
42,270

 
 
 
 
 
$
64,094

 
$
93,823

 
 
 
 

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72
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RESOURCE AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
JUNE 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
June 30, 2014
 
 
 
 
 
CMBS Term Repurchase Facility
 
 
 
 
 
Wells Fargo Bank, National Association (2)
$
7,549

 
18
 
1.37%
 
 
 
 
 
 
RMBS Term Repurchase Facility
 
 
 
 
 
Wells Fargo Bank, National Association
$
5,725

 
1
 
1.15%
 
 
 
 
 
 
CRE Term Repurchase Facilities
 
 
 
 
 
Wells Fargo Bank, National Association
$
128,915

 
18
 
2.55%
Deutsche Bank Securities, LLC
$
15,435

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

 
0
 
—%
Wells Fargo Securities, LLC
$
2,115

 
30
 
1.37%
Deutsche Bank Securities, LLC
$
9,778

 
26
 
1.40%
 
 
 
 
 
 
Residential Mortgage Financing Agreements
 
 
 
 
 
New Century Bank
$
15.227

 
62
 
3.91%
View Point Bank, NA
$
9,089

 
183
 
4.12%
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
CMBS Term Repurchase Facility
 
 
 
 
 
Wells Fargo Bank, National Association (2)
$
10,796

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

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

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

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

 
22
 
1.43%
 
(1)
Equal to the estimated fair value of securities or loans sold, plus accrued interest income, minus the sum of repurchase agreement liabilities plus accrued interest expense.
(2)
$6.0 million and $6.5 million of linked repurchase agreement borrowings are being included as derivative instruments as of June 30, 2014 and December 31, 2013, respectively.
(3)
There are no linked repurchase agreement borrowings being included as derivative instruments as of June 30, 2014. As of December 31, 2013 $17.0 million of linked repurchase agreement borrowings are being included as derivative instruments.


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

CMBS - Term Repurchase Facility
In February 2011, RSO's wholly-owned subsidiaries, RCC Commercial Inc. and RCC Real Estate, Inc. (collectively, the "RCC Subsidiaries"), entered into a master repurchase and securities contract (the “2011 Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”).  Under the 2011 Facility, from time to time, the parties may enter into transactions in which the RCC Subsidiaries and Wells Fargo agree to transfer from the RCC Subsidiaries to Wells Fargo all of their right, title and interest to certain commercial mortgage backed securities and other assets (the “Assets”) against the transfer of funds by Wells Fargo to the RCC Subsidiaries, with a simultaneous agreement by Wells Fargo to transfer the Assets back to the RCC Subsidiaries at a date certain or on demand, against the transfer of funds from the RCC Subsidiaries to Wells Fargo.  The maximum amount of the Facility is $100.0 million which has a two year term with a one year option to extend, and an interest rate equal to the one-month LIBOR plus 1.00% plus a 0.25% initial structuring fee and a 0.25% extension fee upon exercise. The 2011 Facility has a current maturity date of January 31, 2015. The RCC Subsidiaries may enter into interest rate swaps and cap agreements for securities whose average life exceeds two years to mitigate interest rate risk under the 2011 Facility.
The 2011 Facility contains customary events of default, including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, and the institution of bankruptcy or insolvency proceedings that remain unstayed.  The remedies for such events of default are also customary for this type of transaction and include the acceleration of all obligations of the RCC Subsidiaries to repay the purchase price for purchased assets.
 The 2011 Facility also contains margin call provisions relating to a decline in the market value of a security. Under such circumstances, Wells Fargo may require the RCC Subsidiaries to transfer cash in an amount sufficient to eliminate any margin deficit resulting from such a decline.
 Under the terms of the 2011 Facility and pursuant to a guarantee agreement dated February 1, 2011 (the “2011 Guaranty”), RSO agreed to unconditionally and irrevocably guarantee to Wells Fargo the prompt and complete payment and performance of (a) all payment obligations owing by the RCC Subsidiaries to Wells Fargo under or in connection with the 2011 Facility and any other governing agreements and any and all extensions, renewals, modifications, amendments or substitutions of the foregoing; (b) all expenses, including, without limitation, reasonable attorneys' fees and disbursements, that are incurred by Wells Fargo in the enforcement of any of the foregoing or any obligation of the registrant; and (c) any other obligations of the RCC Subsidiaries with respect to Wells Fargo under each of the governing documents.  The 2011 Guaranty includes covenants that, among other things, limit RSO's leverage and debt service ratios and require maintenance of certain levels of cash and net worth. RCC Real Estate and RCC Commercial were in compliance with all debt covenants under the 2011 Facility and 2011 Guaranty as of June 30, 2014.
RMBS - Term Repurchase Facility
In June 2014, the 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 had 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.


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

Under the terms of the 2014 Facility and pursuant to a guarantee agreement dated June 20, 2014 (the “2014 Guaranty”), the Company 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 Company's leverage and debt service ratios and require maintenance of certain levels of cash and net worth. RCC Resi Portfolio and RCC Resi Portfolio TRS were in compliance with all financial debt covenants under the 2014 Facility and 2014 Guaranty as of June 30, 2014.
CRE - Term Repurchase Facilities
On February 27, 2012, RCC Real Estate entered into a master repurchase and securities agreement (the "2012 Facility") with Wells Fargo to finance the origination of commercial real estate loans.  The facility had a maximum amount of $150.0 million and an initial 18 month term.  RSO paid an origination fee of 37.5 basis points (0.375%). On April 12, 2013, RCC Real Estate entered into an amendment which increased the size to $250.0 million and extended the current term of the 2012 Facility to February 27, 2015. The amendment also provides two additional one year extension option at RCC Real Estate's discretion. RCC Real Estate paid structuring fees of $101,000 and an extension fee of $938,000 in connection with the amendment and will amortize the additional fees over the term of the extension.
This 2012 Facility contains customary events of default, including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, and the institution of bankruptcy or insolvency proceedings that remain unstayed.  The remedies for such events of default are also customary for this type of transaction and include the acceleration of all obligations of RSO to repay the purchase price for purchased assets.
 The 2012 Facility also contains margin call provisions relating to a decline in the market value of a security. Under these circumstances, Wells Fargo may require RSO to transfer cash in an amount sufficient to eliminate any margin deficit resulting from such a decline.
 Under the terms of the 2012 Facility and pursuant to a guarantee agreement dated February 27, 2012 (the “2012 Guaranty”), RSO agreed to unconditionally and irrevocably guarantee to Wells Fargo the prompt and complete payment and performance of (a) all payment obligations owing by RSO to Wells Fargo under or in connection with the 2012 Facility and any other governing agreements and any and all extensions, renewals, modifications, amendments or substitutions of the foregoing; (b) all expenses, including, without limitation, reasonable attorneys' fees and disbursements, that are incurred by Wells Fargo in the enforcement of any of the foregoing or any obligation of RSO; and (c) any other obligations of RSO with respect to Wells Fargo under each of the governing documents.  The 2012 Guaranty includes covenants that, among other things, limit RSO's leverage and debt service ratios and require maintenance of certain levels of cash and net worth. RCC Real Estate was in compliance with all debt covenants as of June 30, 2014.
On July 19, 2013, RCC Real Estate's wholly owned subsidiary, RCC Real Estate SPE 5 ("SPE 5") entered into a master repurchase and securities agreement (the "DB Facility") with Deutsche Bank AG, Cayman Islands Branch ("DB") to finance the origination of commercial real estate loans.  The DB Facility has a maximum amount of $200.0 million and an initial 12 month term, ending on July 19, 2014, with two one-year extensions at the option of SPE 5 and subject further to the right of SPE 5 to repurchase the assets held in the facility earlier. RSO paid a structuring fee of 0.25% of the maximum facility amount, as well as other reasonable closing costs. RSO guaranteed SPE 5's performance of its obligations under the DB Facility.
The DB Facility contains provisions that provide DB with certain rights if certain credit events have occurred with respect to one or more assets financed on the DB Facility to require SPE 5 to either repay a portion of the advance on such asset(s) or repay such advance in full (by repurchase of such asset(s). Depending on the nature of the credit event, such repayment may be required notwithstanding the availability of interest and principal payments from assets financed on the DB Facility, or may only be required to the extent of the availability of such payments.


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

The DB Facility contains events of default (subject to certain materiality thresholds and grace periods) customary for this type of financing arrangement, including but not limited to: payment defaults; bankruptcy or insolvency proceedings; a change of control of SPE 5 or RSO; breaches of covenants and/or certain representations and warranties; performance defaults by RSO; a judgment in an amount greater than $100,000 against SPE 5 or $5.0 million in the aggregate against RSO; or a default involving the failure to pay or acceleration of a monetary obligation in excess of $100,000 of SPE 5 or $5.0 million of RSO. The remedies for such events of default are also customary for this type of transaction and include the acceleration of the principal amount outstanding under the DB Facility and the liquidation by DB of assets then subject to the DB Facility. RSO and SPE 5 were in compliance with all debt covenants as of June 30, 2014.
Short-Term Repurchase Agreements - CMBS
On November 6, 2012, RCC Real Estate entered into a master repurchase and securities agreement with JP Morgan Securities LLC to finance the origination of CMBS.  There is no stated maximum amount of the facility and the repurchase agreement has no stated maturity. Interest rates reset monthly.
On February 14, 2012, RCC Real Estate entered into a master repurchase and securities agreement with Wells Fargo Securities, LLC to finance the purchase of CMBS.  There is no stated maximum amount of the facility and the repurchase agreement has no stated maturity date with monthly resets of interest rates.  RSO guaranteed RCC Real Estate’s performance of its obligations under the repurchase agreement.
On March 8, 2005, RCC Real Estate entered into a master repurchase and securities agreement with Deutsche Bank Securities Inc. to finance the purchase of CMBS and the origination of commercial real estate loans.  There is no stated maximum amount of the facility and the repurchase agreement has an initial 12 month term with monthly resets of interest rates.  RSO guaranteed RCC Real Estate’s performance of its obligations under the repurchase agreement.

Residential Mortgage Financing Agreements
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 July 2, 2014, which was amended from the original terms over the course of four amendments. At June 30, 2014, PCM had borrowed $14.8 million under this facility. The facility bears interest at one-month LIBOR plus 3.50%.
The New Century facility contains provisions that provide New Century with certain rights if certain credit events have occurred with respect to one or more assets financed on the New Century facility to require PCM to either repay a portion of the advance on such asset(s) or repay such advance in full (by repurchase of such asset(s)). Depending on the nature of the credit event, such repayment may be required notwithstanding the availability of interest and principal payments from assets financed on the New Century facility, or may only be required to the extent of the availability of such payments.
The New Century facility contains events of default (subject to certain materiality thresholds and grace periods) customary for this type of financing arrangement, including but not limited to: payment defaults; bankruptcy or insolvency proceedings; a change in the nature of PCM's business as a mortgage banker as presently conducted or a change in senior management, including the employment of two senior members of PCM's management staff; breaches of covenants and/or certain representations and warranties; performance defaults by PCM; a judgment in an amount greater than $10,000 against PCM or $50,000 in the aggregate 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 New Century facility and the liquidation by New Century of assets then subject to the New Century facility. The agreement requires PCM to maintain a minimum maintenance balance account at all times of $1.5 million and PCM was in compliance as of June 30, 2014. PCM was in compliance with all financial debt covenants as of June 30, 2014.
PCM has a loan participation agreement with ViewPoint Bank, NA ("ViewPoint") to finance the acquisition of residential mortgage loans. The facility has a maximum amount of $15.0 million and a termination date of December 30, 2014, which was amended from the original terms over the course of five amendments. At June 30, 2014, PCM had borrowed $8.9 million. The facility bears interest at one-month LIBOR with a 4.00% floor.

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

The ViewPoint facility contains provisions that provide ViewPoint with certain rights if certain credit events have occurred with respect to one or more assets financed on the ViewPoint facility to require either 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 ViewPoint facility, or may only be required to the extent of the availability of such payments. The agreement requires PCM to maintain a minimum balance in a deposit account at all times of $1.0 million and PCM was in compliance as of June 30, 2014.
PCM received a waiver on a covenant due to an event of default 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 June 30, 2014.
Mortgage Payable
On August 1, 2011, RSO, through RCC Real Estate, purchased Whispertree Apartments, a 504 unit multi-family property located in Houston, Texas, for $18.1 million.  The property was 95% occupied at acquisition.  In conjunction with the purchase of the property, RSO entered into a seven year mortgage of $13.6 million with a lender.  The mortgage bore interest at a rate of one-month LIBOR plus 3.95%.   At December 31, 2013, there were no outstanding borrowings under this agreement as the property was sold and the underlying mortgage was repaid in 2013.

L.    Related party transactions - RSO
Relationship with LEAF. LEAF Financial originated and managed equipment leases and notes on behalf of RSO. On March 5, 2010, RSO entered into agreements with Lease Equity Appreciation Fund II, L.P. (“LEAF II”) (an equipment leasing partnership sponsored by LEAF Financial and of which a LEAF Financial subsidiary is the general partner), pursuant to which RSO provided an $8.0 million credit facility to LEAF II.  The credit facility initially had a one year term at 12% per year, payable quarterly, and was secured by all the assets of LEAF II, including its entire ownership interest in LEAF II Receivables Funding.  RSO received a 1% origination fee in connection with establishing the facility.  The facility originally matured on March 3, 2011 and was extended until September 3, 2011 with a 1% extension fee paid on the outstanding loan balance.  On June 3, 2011, RSO entered into an amendment to extend the maturity to February 15, 2012 and decrease the interest rate from 12% to 10% per annum resulting in a troubled-debt restructuring under current accounting guidance.  On February 15, 2012, the credit facility was further amended to extend the maturity to February 15, 2013 with a 1% extension fee accrued and added to the amount outstanding.  On January 11, 2013, RSO entered into another amendment to extend the maturity to February 15, 2014 with an additional 1% extension fee accrued and added to the amount outstanding. On December 17, 2013, RSO entered into another amendment to extend the maturity to February 15, 2015. Principal payments of $715,000 were made during six months ended June 30, 2014. During the three months ended June 30, 2014, RSO recorded a $700,000 allowance for loan loss. The loan amount outstanding at June 30, 2014 and December 31, 2013 was $4.7 million and $5.7 million, respectively.
RSO's resulting interest from the formation of LEAF is accounted for under the equity method. For the three and six months ended June 30, 2014 RSO recorded a loss of $278,000 and $872,000 , respectively, and for the three and six months ended June 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 valued at $40.1 million and $41.0 million as of June 30, 2014 and December 31, 2013, respectively.
Relationship with CVC Credit Partners. On April 17, 2012, ACM, a former subsidiary of the Company, was sold to CVC Credit Partners, a joint venture entity in which the Company owns a 33% interest.  CVC Credit Partners manages internally and externally originated bank loan assets on RSO’s behalf.  On February 24, 2011, a subsidiary of RSO purchased 100% of the ownership interests in Churchill Pacific Asset Management LLC ("CPAM") from Churchill Financial Holdings LLC for $22.5 million.  CPAM subsequently changed its name to Resource Capital Asset Management ("RCAM"). Through RCAM, RSO was initially entitled to collect senior, subordinated and incentive fees related to five CLOs holding approximately $1.9 billion in assets managed by RCAM.  RCAM is assisted by CVC Credit Partners in managing these CLOs.  CVC Credit Partners is entitled to 10% of all subordinated fees and 50% of the incentive fees received by RCAM.  For the three months ended June 30, 2014, CVC Credit Partners incurred subordinated fees of $330,000 and $700,000, respectively. For the three and six months ended June 30, 2013, CVC Credit Partners incurred subordinated fees of $174,000 and $355,000. 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

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

ownership to 68.3%. In September 2013, this CLO was called and the notes were paid down in full. Another RCAM-managed CLO also elected to redeem its outstanding notes in whole in February 2013.
In May, June and July 2013, RSO invested a total of $15.0 million into a limited partnership agreement with CVC Global Credit Opportunities Fund, L.P. ("the Partnership"), a Delaware limited partnership which generally invests in assets through a master-feeder fund structure ("the Master Fund"). The fund will pay the investment manager a quarterly management fee in advance calculated at the rate of 1.5% annually based on the balance of each limited partner's capital account. RSO's management fee was waived upon entering the agreement given that RSO is a related party of CVC Credit Partners. For the three and six months ended June 30, 2014, RSO recorded earnings of $1.1 million 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 six months ended June 30, 2013, RSO recorded earnings of $93,000. The fund's investment balance of $18.1 million and $16.2 million as of June 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 six months ended June 30, 2014, RSO paid Ledgewood $120,000 and $158,000 , respectively, and for the three and six months ended June 30, 2013 $40,000 and $86,000 in connection with legal services rendered to RSO.
M.    Fair value of financial instruments
In analyzing the fair value of its investments accounted for on a fair value basis, RSO follows the fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  RSO determines fair value based on quoted prices when available or, if quoted prices are not available, through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment.  The hierarchy followed defines three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date. 
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 - Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment.  RSO evaluates its hierarchy disclosures each quarter; depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter.  However, RSO expects that changes in classifications between levels will be rare.
Certain assets and liabilities are measured at fair value on a recurring basis.  The following is a discussion of these assets and liabilities as well as the valuation techniques applied to each for fair value measurement.
RSO reports its investment securities available-for-sale at fair value. To determine fair value, RSO uses an independent third-party valuation firm utilizing data available in the market as well as appropriate prepayment, default, and recovery rates. These valuations are validated utilizing dealer quotes or bids. If there is a material difference between the value indicated by the third-party-valuation firm and the dealer quote or bid, RSO will evaluate the difference which could result in an updated valuation from the third party or a revised dealer quote. Based on a prioritization of inputs used in the valuation of each position, RSO categorizes these investments as either Level 2 or Level 3 in the fair value hierarchy.

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

RSO reports its investment securities, trading at fair value, based on an independent third-party valuation. RSO evaluates the reasonableness of the valuation it receives by using a dealer quote. If there is a material difference between the value indicated by the third-party and a quote RSO receives, RSO's management will evaluate the difference. Any changes in fair value are recorded on RSO’s results of operations as net unrealized (loss) gain on investment securities, trading.
The CMBS underlying RSO’s Linked Transactions are valued using the same techniques as those used for RSO’s other CMBS. The value of the underlying CMBS is then netted against the carrying amount (which approximates fair value) of the repurchase agreement borrowing at the valuation date. The fair value of Linked Transactions also includes accrued interest receivable on the CMBS and accrued interest payable on the underlying repurchase agreement borrowings. RSO’s Linked Transactions are classified as Level 2 or Level 3 in the fair value hierarchy.
Derivatives (interest rate swaps and interest rate caps), both assets and liabilities, are reported at fair value, and are valued by a third-party pricing agent using an income approach with models that use, as their primary inputs, readily observable market parameters.  This valuation process considers factors including interest rate yield curves, time value, credit factors and volatility factors.  Although RSO has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by RSO and its counterparties.  RSO assesses the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and, if material, categorizes those derivatives within Level 3 of the fair value hierarchy.
The following table presents information about RSO’s assets (including derivatives that are presented net) measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized by RSO to determine such fair value as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
June 30, 2014
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investment securities, trading
$
—

 
$
—

 
$
8,951

 
$
8,951

Investment securities available-for-sale
1,886

 
1,581

 
261,036

 
264,503

CMBS - linked transactions
—

 
—

 
13,676

 
13,676

Derivatives (net)
—

 
755

 
—

 
755

Total assets at fair value
$
1,886

 
$
2,336

 
$
283,663

 
$
287,885

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Derivatives (net)
—

 
785

 
9,070

 
9,855

Total liabilities at fair value
$
—

 
$
785

 
$
9,070

 
$
9,855

 
 
 
 
 
 
 
 
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


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

The following table presents additional information about assets which are measured at fair value on a recurring basis for which RSO has utilized Level 3 inputs (in thousands):
 
CMBS Including Linked Transactions
 
ABS
 
RMBS
 
Structured Finance
 
Total
Beginning balance, January 1, 2014
$
210,785

 
$
26,656

 
$
451

 
$
11,107

 
$
248,999

Total gains or losses (realized or unrealized):
 

 
 
 
 
 
 
 
 
Included in earnings
(720
)
 
470

 


 
379

 
129

Purchases
93,291

 
37,397

 
31,058

 
—

 
161,746

Sales
(99,151
)
 
(2,494
)
 


 
(758
)
 
(102,403
)
Paydowns
(25,435
)
 
(5,403
)
 
(18
)
 
—

 
(30,856
)
Included in OCI
7,280

 
1,388

 
(511
)
 
(2,109
)
 
6,048

Transfers out of Level 2
—

 
—

 
—

 
—

 
—

Transfers into level 3
—

 
—

 
—

 
—

 
—

Ending balance, June 30, 2014
$
186,050

 
$
58,014

 
$
30,980

 
$
8,619

 
$
283,663

In accordance with ASC 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
(1,121
)
Ending balance, June 30, 2014                                                                              
$
9,070

RSO had no losses included in earnings due to the other-than-temporary impairment charges during the three and six months ended June 30, 2014 and $535,000 and $21,000 during the three and six months ended June 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 six months ended June 30, 2014 was $0 and $440,000, respectively, and for the three and six months ended June 30, 2013, was $2.4 million and $3.0 million, respectively, and is included in the consolidated statements of operations as provision for loan and lease losses.

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

The following table summarizes the financial assets and liabilities measured at fair value on a nonrecurring basis and indicates the fair value hierarchy of the valuation techniques utilized by RSO to determine such fair value as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
June 30, 2014
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Loans held for sale
$
—

 
$
15,427

 
$
24,859

 
$
40,286

Impaired loans
—

 
1,125

 
5,200

 
6,325

Total assets at fair value
$
—

 
$
16,552

 
$
30,059

 
$
46,611

 
 
 
 
 
 
 
 
December 31, 2013
 

 
 

 
 

 
 

Assets:
 

 
 

 
 

 
 

Loans held for sale
$
—

 
$
6,850

 
$
15,066

 
$
21,916

Impaired loans
—

 
225

 
—

 
225

Total assets at fair value
$
—

 
$
7,075

 
$
15,066

 
$
22,141

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31, 2013, the significant unobservable inputs used in the fair value measurements were as follows (in thousands):
 
Fair Value at
June 30, 2014
 
Valuation Technique
 
Significant
Unobservable Inputs
 
Significant
Unobservable
Input Value
Interest rate swap agreements
$
9,070

 
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 was primarily measured using a third-party pricing service.  The fair value of RSO’s Level 3 Loans held-for-investment was measured by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Loans receivable-related party are estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
CDO notes are valued using the dealer quotes, typically the dealer who underwrote the CDO in which the notes are held.
Junior subordinated notes are estimated by obtaining quoted prices for similar assets in active markets.
RSO elected the fair value option for Moselle, CLO when it consolidated it in 2014. RSO elected fair value for this externally managed CLO because the information it was able to obtain from the manager pointed to a fair value approach. RSO also considered that the assets are easily priced and liquid in nature. The Company recorded a gain of $1.3 million on the fair value of loans of Moselle CLO and a loss of $430,000 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 the months ended June 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 June 30, 2014 there were no significant gains or losses for the assets or liabilities due to credit risk.

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

The fair values of RSO’s remaining financial instruments that are not reported at fair value on the consolidated balance sheets are reported 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)
June 30, 2014
 
 
 
 
 
 
 
 
 
Loans held-for-investment (1)
$
1,740,656

 
$
1,732,134

 
$
—

 
$
704,319

 
$
1,027,815

Loans receivable-related party
$
4,751

 
$
4,751

 
$
—

 
$
—

 
$
4,751

CDO notes (2)
$
1,108,287

 
$
1,020,334

 
$
—

 
$
1,020,334

 
$
—

Junior subordinated notes
$
51,104

 
$
17,598

 
$
—

 
$
—

 
$
17,598

Repurchase agreements
$
312,893

 
$
312,893

 
$
—

 
$
—

 
$
312,893

 
 
 
 
 
 
 
 
 
 
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 $124.9 million and a fair value of $120.8 million at June 30, 2014.
(2)
Contains notes for which the fair value method was elected with an unpaid principal balance of $143.0 million and a fair value of $140.2 million at June 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 (see Note 17). As a result of the payment, the Company re-evaluated the VIE for consolidation and determined to exclude it on the basis of immateriality to the consolidated financial statements.
VIEs not consolidated
The Company’s investments in 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 June 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 June 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
—

 
678

 
678

   RREGPS
—

 
716

 
716

 
$
158

 
$
1,394

 
$
1,552

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

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

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:
Effective July 3, 2014, PCM closed a $75.0 million facility with Wells Fargo comprised of a $25.0 million maximum committed amount and a maximum uncommitted amount of $50.0 million, terminating on July 2, 2015.
On July 30, 2014, RSO closed Resource Capital Corp. 2014-CRE2, Ltd., a $354 million real estate securitization that provides financing for commercial real estate loans. At closing, RSO was able to pay down the Wells Fargo CRE term repurchase facility and the Deutsche Bank term repurchase facility by $217.8 million and $20.4 million, respectively.



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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
The financial information presented reflects the operations and assets of Resource Capital Corp, a publicly-traded real estate investment trust, or REIT, which we sponsored and manage (NYSE: RSO), on a consolidated basis with our operations and assets. In management’s discussion and analysis that follows, we analyze the Resource America operations by its three business segments: Real Estate, Financial Fund Management, and Commercial Finance and one other segment, RSO, which is a consolidated VIE. Each of our operating segments earns fees for acquiring, managing, and/or financing certain assets on behalf of RSO, for which we receive payment. These revenues are included in the tables that follow and then eliminated in order to reflect the consolidation of RSO for accounting purposes.
We are a specialized asset management company that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through our real estate, financial fund management and commercial finance subsidiaries as well as our joint ventures. As a specialized asset manager, we seek to develop investment funds for outside investors for which we provide asset management services, typically under long-term management arrangements either through a contract with, or as the manager or general partner of, our sponsored investment funds. We typically maintain an investment in the funds we sponsor. As of June 30, 2014, we managed $18.9 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, RREGP. 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 ten CLOs with a total par value of approximately $5.3 billion since its formation 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 $1.6 million and $2.8 million during the three and six months ended June 30, 2014 on our receivables due from three of our commercial finance investment funds based on reductions in their projected cash flows. We had provided a limited guarantee to a lender of Lease Equity Appreciation Fund I, L.P., or LEAF I, one of our sponsored commercial finance investment partnerships. On March 20, 2014, pursuant to the guarantee, we paid $954,000 to the lender on behalf of LEAF I to pay off the remaining loan balance and became subrogated to the lender's position on the loan.
We recorded consolidated net income attributable to common shareholders of $2.7 million and $3.7 million for the three and six months ended June 30, 2014, respectively.

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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 $18.9 billion at June 30, 2014 from $16.1 billion at June 30, 2013. The following table sets forth information relating to our assets under management by operating segment (in millions, except percentages) (1):
 
June 30,
 
Increase
 
2014
 
2013
 
Amount
 
Percentage
Financial fund management (2)
$
15,428

 
$
13,619

 
$
1,809

 
13%
Real estate (3)
2,831

 
1,922

 
909

 
47%
Commercial finance
635

 
554

 
81

 
15%
 
$
18,894

 
$
16,095

 
$
2,799

 
17%
 
 
 
 
 
 
 
 
Net assets under management (4)
$
8,828

 
$
7,095

 
$
1,733

 
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 $256 million increase in private equity and other assets offset, in part, by reductions in eligible collateral bases of our ABS ($146.0 million) and trust preferred portfolios ($130.1 million).
(3)
The increase is primarily due to the $655.0 million increase in assets managed for RRE Opportunity REIT I; the offering for this fund was completed in December 2013.
(4)
Net assets under management represents the proportionate share of assets we manage after reflecting joint venture arrangements.
Our assets under management are primarily managed through various investment entities including CDOs and CLOs, public and private limited partnerships, TIC property interest programs, two REITs, and other investment funds. The following table sets forth the number of entities we manage by operating segment:
 
CDOs and CLOs
 
Limited Partnerships
 
TIC Programs
 
Other
Investment
Funds
As of June 30, 2014 (1)
 
 
 
 
 
 
 
Financial fund management
46
 
8
 
—
 
8
Real estate
2
 
8
 
6
 
6
Commercial finance
—
 
4
 
—
 
2
 
48
 
20
 
6
 
16
As of June 30, 2013 (1)
 
 
 
 
 
 
 
Financial fund management
44
 
13
 
—
 
3
Real estate
2
 
9
 
6
 
5
Commercial finance
—
 
4
 
—
 
2
 
46
 
26
 
6
 
10
 
(1)
All of our operating segments manage assets on behalf of RSO.

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As of June 30, 2014 and 2013, we managed assets in the following classes for the accounts of institutional and individual investors, Resource Capital Corp., or RSO, and for our own account (in millions):
 
June 30, 2014
 
June 30, 2013
 
Institutional and
Individual Investors
 
RSO
 
Company
 
Total
 
Total
Bank loans (1) 
$
9,361

 
$
1,534

 
$
—

 
$
10,895

 
$
9,003

Trust preferred securities (2) 
3,269

 
—

 
—

 
3,269

 
3,400

Asset-backed securities (2) 
936

 
—

 
—

 
936

 
1,082

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

 
1,316

 
—

 
1,320

 
1,035

Real properties (3) 
1,436

 
44

 
16

 
1,496

 
886

Commercial finance assets (4) 
635

 
—

 
—

 
635

 
554

Private equity and other assets (2) 
75

 
268

 
—

 
343

 
135

 
$
15,716

 
$
3,162

 
$
16

 
$
18,894

 
$
16,095

 
 
 
 
 
 
 
 
 
 
Net assets under management (5)
$
6,971

 
$
1,841

 
$
16

 
$
8,828

 
$
7,095

 
(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 June 30, 2014, we had 661 full-time employees, an increase of 36 (6%) from June 30, 2013. The following table summarizes our employees by operating segment:
 
Total
 
Real Estate
 
Financial Fund
Management
 
Corporate/
Other
June 30, 2014
 
 
 
 
 
 
 
Investment professionals
74
 
57
 
14
 
3
Other
92
 
30
 
13
 
49
 
166
 
87
 
27
 
52
Property management
495
 
495
 
—
 
—
Total
661
 
582
 
27
 
52
 
 
 
 
 
 
 
 
June 30, 2013
 
 
 
 
 
 
 
Investment professionals
57
 
43
 
11
 
3
Other
72
 
18
 
15
 
39
 
129
 
61
 
26
 
42
Property management
496
 
496
 
—
 
—
Total
625
 
557
 
26
 
42
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): 

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Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Fund management revenues (1) 
$
14,950

 
$
8,375

 
$
30,219

 
$
16,343

Finance and rental revenues (2) 
2,680

 
2,614

 
4,668

 
4,619

RSO management fees (3) 
3,015

 
2,561

 
5,797

 
5,135

Gains on resolution of loans (4) 
—

 
17

 
—

 
1,623

Other revenues
902

 
996

 
1,114

 
2,292

Subtotal - Resource America revenues before consolidating with RSO
21,547

 
14,563

 
41,798

 
30,012

RSO - consolidated VIE revenues
34,608

 
21,647

 
66,539

 
52,225

Elimination of consolidated VIE revenues attributed to operating segments
(3,040
)
 
(2,725
)
 
(5,920
)
 
(5,425
)
 
$
53,115

 
$
33,485

 
$
102,417

 
$
76,812

 
(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 a sponsored real estate investment entity as well as through joint ventures with institutional investors, that principally invest in multifamily housing;
•
the management, principally for RSO, of general investments in commercial real estate debt, including first mortgage debt, whole loans, mortgage participations, B notes, mezzanine debt and related commercial real estate securities; and
•
to a significantly lesser extent, the management and resolution of a portfolio of real estate property interests that we acquired at various times between 1991 and 1999, which we collectively refer to as our legacy portfolio.
The following table sets forth information related to real estate assets managed (1) (in millions):
 
June 30,
 
2014
 
2013
Assets under management (1):
 
 
 
Commercial real estate debt for RSO
$
1,258

 
$
999

Real estate investment funds and programs
572

 
582

RRE Opportunity REIT I
843

 
188

RRE Opportunity REIT II
10

 
—

Distressed portfolios
9

 
57

Properties managed for RSO
35

 
64

Institutional portfolios
15

 
15

Residential mortgages for RSO
58

 
—

Legacy portfolio
16

 
16

RREGPS
3

 
—

DIF
12

 
1

 
$
2,831

 
$
1,922

 
 
 
 
Net assets under management
$
2,829

 
$
1,922


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(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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Management fees:
 
 
 
 
 
 
 
REIT management fees from RSO
$
2,264

 
$
2,690

 
$
4,206

 
$
4,858

Property management fees
2,779

 
2,676

 
5,182

 
5,193

Asset management fees
2,435

 
1,348

 
5,081

 
2,550

Broker-dealer fees
56

 
1,582

 
56

 
2,690

 
7,534

 
8,296

 
14,525

 
15,291

Other:
 

 
 

 
 
 
 
Rental property income and revenues of consolidated VIEs (1)
1,578

 
1,518

 
2,517

 
2,467

Master lease revenues
1,102

 
1,096

 
2,151

 
2,152

Fee income from sponsorship of investment entities
3,460

 
1,557

 
8,111

 
2,271

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

 
17

 
—

 
1,623

Equity in losses of unconsolidated entities
(226
)
 
(331
)
 
(581
)
 
(311
)
 
$
13,448

 
$
12,153

 
$
26,723

 
$
23,493

Costs and expenses:
 

 
 

 
 
 
 
General and administrative expenses
$
4,006

 
$
3,086

 
$
8,086

 
$
6,593

Property management expenses
2,170

 
2,194

 
4,390

 
4,549

Broker-dealer expenses
1,053

 
1,398

 
1,631

 
2,584

Master lease expenses
1,052

 
1,387

 
2,219

 
2,966

Rental property expenses and expenses of consolidated VIEs (1)
824

 
831

 
1,654

 
1,644

 
$
9,105

 
$
8,896

 
$
17,980

 
$
18,336

 
(1)
We generally consolidate a VIE when we are deemed to be the primary beneficiary of the entity.
Revenues − Three and Six Months Ended June 30, 2014 as Compared to the Three and Six Months Ended June 30, 2013
Revenues from our real estate operations increased $1.3 million (11%) and $3.2 million (14%) to $13.4 million and $26.7 million for three and six months ended June 30, 2014, respectively, from $12.2 million and $23.5 million for the three and six months ended June 30, 2013, respectively.  We attribute these increases primarily to the following:
Other revenues
•
a $1.9 million and $5.8 million increase in fee income in connection with the purchase and third-party financing of properties through our real estate investment entities, as follows:
•
during the three and six months ended June 30, 2014, we earned $3.5 million and $8.1 million in fees, respectively, primarily from the following activities:
•
the acquisition of five and seven properties (valued at $122.1 million and $236.7, respectively);
•
the acquisition of joint venture interests in 10 multifamily communities (valued at $51.2 million);
•
the sale of two and four properties (valued at $24.0 million and $106.9 million, respectively); and

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•
the placement of $127.8 million and $242.8 million, respectively, of financings on properties.
•
in comparison, during the three and six months ended June 30, 2013, we earned $1.6 million and $2.3 million in fees, respectively, primarily from the following activities:
•
the acquisition of three and five properties (valued at $45.8 million and $64.4 million, respectively);
•
the sale of one and three properties (valued at $10.2 million and $23.3 million, respectively); and
•
and the refinancing of one property.
Management fees
•
a $1.1 million and $2.5 million increase in asset management fees, principally due to a $1.3 million and $2.1 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 $143,000 and $241,000 decrease in fees, respectively, related to assets sold by an RSO joint venture.
The increase in management fees was more than offset by the following:
•
a $1.5 million and $2.6 million decrease in broker-dealer manager fees. During the three and six months ended June 30, 2013, we earned broker-dealer manager fees in connection with the RRE Opportunity REIT I offering, which closed in December 2013; and
•
a $17,000 and $1.6 million decline in gains and fees on the resolution of property interests. During the six months ended June 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 in the three and six months ended June 30, 2014.
Costs and Expenses − Three and Six Months Ended June 30, 2014 as Compared to the Three and Six Months Ended June 30, 2013
Costs and expenses of our real estate operations increased $209,000 (2%) for the three months ended June 30, 2014 and decreased $356,000 (-1.9%) for the six months ended June 30, 2014 as compared to the same periods in the prior year. We attribute these changes primarily to the following:
•
a $920,000 and $1.5 million increase in general and administrative expenses, including a $211,000 and $626,000 increase in wages and benefits in conjunction with the increased operating activities of RRE Opportunity REIT I and II as well as the additional staffing and related costs required to manage the increased properties under management;
•
a $335,000 and $747,000 decrease in expenses for our master lease; and
•
a $345,000 and $953,000 decrease in expenses for our broker-dealer. During the three and six months ended June 30, 2013, we incurred commission costs of $614,000 and $1.1 million, respectively, in conjunction with the RRE Opportunity REIT I offering.
Results of Operations:  Financial Fund Management
General. We conduct our financial fund management operations primarily through seven separate operating entities:
•
CVC Credit Partners, 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.

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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
June 30, 2014
 
 
 
 
 
CVC Credit Partners
$
9,361

 
$
1,534

 
$
10,895

Trapeza
3,269

 
—

 
3,269

Ischus
936

 
—

 
936

Other
60

 
268

 
328

 
$
13,626

 
$
1,802

 
$
15,428

 
 
 
 
 
 
Net assets under management
$
5,518

 
$
481

 
$
5,999

 
 
 
 
 
 
June 30, 2013
 

 
 

 
 

CVC Credit Partners
$
6,502

 
$
2,501

 
$
9,003

Trapeza
3,400

 
—

 
3,400

Ischus
1,082

 
—

 
1,082

Other company-sponsored partnerships
134

 
—

 
134

 
$
11,118

 
$
2,501

 
$
13,619

 
 
 
 
 
 
Net assets under management
$
4,753

 
$
420

 
$
5,173

 
(1)
For information on how we calculate assets under management, see "Assets Under Management" above.
CVC Credit Partners
We and our joint venture partner have 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 $10.9 billion in U.S. and European bank loans and corporate bonds at June 30, 2014, of which $1.5 billion are managed on behalf of RSO.
For the CLOs managed, we earn average fees of 0.12% (senior) and 0.26% (subordinate) of the aggregate principal balance of 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. During the three and six months ended June 30, 2014, we also received 75% of the incentive management fees generated by seven legacy Apidos CLOs.
For separately managed accounts, we earn approximately 0.73% on the average balance of assets managed.
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 June 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 partners of three affiliated limited partnerships, which are all in the process of liquidation. Two 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 $936.0 million in real estate ABS, including RMBS, CMBS and credit default swaps at June 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.

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Other
Through RFIG, we sponsored, structured and currently manage seven affiliated partnerships for individual and institutional investors, which hold approximately $59.0 million of investments in financial institutions at June 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Fund management fees
$
1,259

 
$
711

 
$
2,074

 
$
1,444

Fund management fees - incentive
3,798

 
705

 
4,857

 
1,114

RSO management fees - trading portfolio
—

 
(266
)
 
—

 
(40
)
RSO management fees
751

 
137

 
887

 
292

Structuring and placement fees
40

 
—

 
3,367

 
—

Loan origination fees
710

 
—

 
923

 
—

Introductory agent fees
145

 
162

 
693

 
493

Equity in earnings of unconsolidated CDO issuers
218

 
213

 
461

 
440

Equity in earnings of CVC Credit Partners
280

 
(477
)
 
641

 
105

Gains, net, on trading securities
872

 
966

 
1,055

 
2,242

Other revenues
30

 
31

 
59

 
51

 
8,103

 
2,182

 
15,017

 
6,141

Total limited and general partner interests
38

 
263

 
199

 
591

 
$
8,141

 
$
2,445

 
$
15,216

 
$
6,732

Costs and expenses:
 

 
 

 
 
 
 
General and administrative expenses
$
2,779

 
$
1,694

 
$
7,168

 
$
4,222

Revenues − Three Months Ended June 30, 2014 as Compared to the Three Months Ended June 30, 2013
Revenues increased $5.7 million (233%) to $8.1 million for the three months ended June 30, 2014 from $2.4 million for three months ended June 30, 2013. We attribute the increase to the following:
•
a $548,000 increase in fund management fees, primarily due to the collection of a deferred subordinated collateral management fee from our Trapeza operations;
•
a $3.1 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, one of which was substantially liquidated during the quarter;
•
a $266,000 increase in incentive management fees is reflective of the adjustment recorded in 2013 to reduce accrued fees on a portfolio we previously managed on behalf of RSO. The portfolio has been substantially liquidated in 2014 and there was no such adjustment in the current quarter;
•
a $614,000 increase in RSO management fees, reflecting the allocation of a portion of the RSO base management fees to Northport for middle market assets managed on behalf of RSO;
•
a $710,000 increase in loan origination fees, reflecting the new fees earned by Northport during 2014 in connection with middle market loans issued by RSO; and
•
a $757,000 increase in equity in earnings of CVC Credit Partners.

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These increases were partially offset by the following decreases, which can vary significantly by quarter:
•
a $94,000 decrease in realized and unrealized gains and interest recorded on our trading portfolio; and
•
a $225,000 decrease in fair value adjustments recorded for our limited and general partner interests in unconsolidated company-sponsored partnerships.
Revenues − Six Months Ended June 30, 2014 as Compared to the Six Months Ended June 30, 2013
Revenues increased $8.5 million (126%) to $15.2 million for the six months ended June 30, 2014 from $6.7 million in the six months ended June 30, 2013. We attribute the increase primarily to the following:
•
a $630,000 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 positive fair value adjustments.
•
a $3.7 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 $595,000 increase in RSO management fees, reflecting the allocation of a portion of the RSO base management fees to Northport for middle market assets managed on behalf of RSO.
•
a $3.4 million increase in structuring and placement fees, principally due to fees earned by Resource Capital Markets for underwriting a European CLO for an unrelated third-party collateral manager;
•
a $923,000 increase in loan origination fees, reflecting the new fees earned by Northport during 2014 in connection with middle market loans issued by RSO;
•
a $200,000 increase in introductory agent fees as a result of fees earned in connection with 14 structured security transactions with an average fee of $49,500 as compared to 19 structured security transactions with an average fee of $26,000 for the prior year period; and
•
a $536,000 increase in equity in earnings of CVC Credit Partners, due primarily to the 2013 up-front transaction costs associated with the public offering of the European Opportunities Fund, which closed in June 2013.
These increases were partially offset by the following decreases, which can vary significantly by quarter:
•
a $1.2 million decrease in realized and unrealized gains and interest recorded on our trading securities portfolio; and
•
a $392,000 decrease in fair value adjustments recorded for our limited and general partner interests in unconsolidated company-sponsored partnerships.
Costs and Expenses − Three Months Ended June 30, 2014 as Compared to Three Months Ended June 30, 2013
    Costs and expenses of our financial fund management operations increased $1.1 million (64%) to $2.8 million for the three months ended June 30, 2014 from $1.7 million for the three months ended June 30, 2013. We attribute the cost and expense increase due to an increased number of employees ($624,000) to manage the expanding assets under management and due to an adjustment taken in 2013 which, in effect, reduced our prior year expenses as reflected in conjunction with the trading portfolio managed on behalf of RSO ($332,000).
Costs and Expenses − Six Months Ended June 30, 2014 as Compared to Six Months Ended June 30, 2013
    Costs and expenses of our financial fund management operations increased $2.9 million (70%) to $7.2 million and for the three months ended June 30, 2014 from $4.2 million in the six months ended June 30, 2013, primarily as a result of the increased number of employees ($1.3 million) and an increase in incentive compensation in connection with structuring and placement fees earned ($1.7 million).
Results of Operations:  Commercial Finance
The commercial finance assets we manage through LEAF Commercial Capital Inc., or LEAF, increased by $81.0 million to $635.0 million as compared to $554.0 million at June 30, 2013. This increase reflects a $130.0 million increase in the LEAF portfolio, offset in part by a $49.0 million decrease in the assets managed by our four investment partnerships, reflecting the natural runoff of those portfolios. As of June 30, 2014, LEAF managed approximately 59,000 leases and loans for itself and our investment entities, with an average original finance value of $22,000 and an average term of 54 months. As of June 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.
    

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The following table sets forth information related to commercial finance assets managed by us and LEAF, our unconsolidated joint venture (1) (in millions):
 
June 30,
 
2014
 
2013
LEAF
$
590

 
$
460

Commercial finance investment partnerships
45

 
94

 
$
635

 
$
554


(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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
  Equity in losses of investment entities
$
(40
)
 
$
(32
)
 
$
(137
)
 
$
(205
)
  Equity in losses of LEAF
(2
)
 
(3
)
 
(4
)
 
(8
)
 
$
(42
)
 
$
(35
)
 
$
(141
)
 
$
(213
)
Costs and expenses:
 

 
 

 
 
 
 
General and administrative expenses - wage and benefit costs
$
102

 
$
70

 
$
187

 
$
103

General and administrative expenses - other
21

 
(289
)
 
39

 
(277
)
 
$
123

 
$
(219
)
 
$
226

 
$
(174
)
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 $276,000 and $500,000 of fund management fees from these entities during the three and six months ended June 30, 2014 and $483,000 and $1.1 million during the three and six months ended June 30, 2013, respectively.
Results of Operations:  Other Costs and Expenses
General and Administrative Expenses
General and administrative costs were $2.7 million and $5.9 million for the three and six months ended June 30, 2014, respectively, an increase of $580,000 (27%) and $1.6 million (37%) as compared to $2.1 million and $4.3 million for the three and six months ended June 30, 2013, respectively. Wages and benefits increased relative to our increased assets managed by $424,000 and $839,000 for the three and six months ended June 30, 2014, respectively, including an additional $164,000 and $274,000, respectively, of expense related to stock-based compensation awards. For the six months ended June 30, 2014, professional fees increased by $621,000 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 six months ended June 30, 2014. During the six months ended June 30, 2013, we recorded $214,000 of impairment losses on certain of our investments in CLOs, primarily those with investment in bank loans.

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Provision for Credit Losses
The following table sets forth our provision for credit losses as reported by segment (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Commercial finance:
 
 
 
 
 
 
 
Receivables from managed entities
$
1,587

 
$
1,482

 
$
2,799

 
$
4,345

Leases and loans and future payment card receivables
(5
)
 
(4
)
 
(6
)
 
(7
)
Real estate:
 

 
 

 
 
 
 
Receivables from managed entities
1

 
(4
)
 
2

 
(2,537
)
Rent receivables
(8
)
 
(26
)
 
(12
)
 
(15
)
Financial fund management:
 
 
 
 
 
 
 
Receivables from managed entities
—

 
199

 
—

 
—

 
$
1,575

 
$
1,647

 
$
2,783

 
$
1,786

We have estimated, based on projected cash flows, that three of the commercial finance partnerships that we sponsored and managed will not have sufficient funds to pay a portion of their accrued management fees and, accordingly, we recorded provisions of $1.6 million and $2.8 million for the three and six months ended June 30, 2014, respectively, and $1.5 million and $4.3 million for the three and six months ended June 30, 2013, respectively.
During the six months ended June 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Real estate property investments
$
133

 
$
240

 
$
262

 
$
420

Other operating segments - primarily depreciation on fixed assets
332

 
249

 
654

 
485

Total depreciation expense
$
465

 
$
489

 
$
916

 
$
905

Interest Expense
Interest expense includes the non-cash amortization of debt issuance costs. During the three and six months ended June 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Corporate
$
297

 
$
294

 
$
584

 
$
590

Real estate
191

 
207

 
387

 
404

Commercial finance
9

 
—

 
9

 
1

 
$
497

 
$
501

 
$
980

 
$
995


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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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Noncontrolling interests in consolidated VIE - RSO (1)
$
(17,405
)
 
$
(8,372
)
 
$
(34,556
)
 
$
(20,686
)
Other:
 
 
 
 
 
 
 
  Real estate - hotel property (2) 
$
(92
)
 
$
(26
)
 
$
(62
)
 
$
17

  Real estate - Australian joint venture (3)
8

 
—

 
18

 
—

 
$
(84
)
 
$
(26
)
 
$
(44
)
 
$
17

 
(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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
RAI
$
2,181

 
$
(1,511
)
 
$
3,250

 
$
(1,657
)
RSO
(446
)
 
1,737

 
(430
)
 
3,499

Total
$
1,735

 
$
226

 
$
2,820

 
$
1,842

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 46% and 43% for the three and six months ended June 30, 2014, respectively, as compared to a 4,084% and 279% benefit for the three and six months ended June 30, 2013. The change in the income tax rate primarily relates to additional tax benefits recorded for the three and six months ended June 30, 2013 which are not applicable for the three and six months ended June 30, 2014. Our effective income tax rate without discrete tax items would have been 39% and 35% for the three and six months ended June 30, 2014.

We project our effective tax rate to be between 38% and 42% for 2014. This rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings and the level of our tax credits. We take certain of these and other factors, including our history of pretax earnings, into account in assessing our ability to realize our net deferred tax assets.  We are subject to examination by the U.S. Internal Revenue Service, or IRS, and other taxing authorities in certain states in which we have significant business operations.  In addition, we are currently undergoing a New York State examination for the fiscal years ended September 2007 through 2009.  We are no longer subject to U.S. federal income tax examinations for years before 2010 and are no longer subject to state and local income tax examinations 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.


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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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Total interest income
$
30,592

 
$
30,715

 
$
57,677

 
$
64,035

Interest expense
10,610

 
11,134

 
20,247

 
22,299

Net interest income
19,982

 
19,581

 
37,430

 
41,736

Other revenues
14,626

 
2,066

 
29,109

 
10,489

Total revenues
34,608

 
21,647

 
66,539

 
52,225

Operating expenses
19,415

 
13,105

 
32,555

 
31,055

Net operating income
15,193

 
8,542

 
33,984

 
21,170

Other revenues
2,509

 
—

 
1,178

 
—

Net income
$
17,702

 
$
8,542

 
$
35,162

 
$
21,170

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 June 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 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 June 30, 2014, our liquidity consisted of four primary sources:
•
cash on hand of $11.9 million;
•
$14.4 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 June 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 June 30, 2014, our total borrowings outstanding of $20.6 million included $10.0 million of Senior Notes, $10.2 million of mortgage debt (secured by the underlying property) and $370,000 of other debt.

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Capital Requirements
Our capital needs consist principally of funds to make investments in the investment vehicles we sponsor or for our own account and to provide bridge financing or other temporary financial support to facilitate asset acquisitions by our sponsored investment vehicles. Accordingly, the amount of capital we require will depend to a significant extent upon our level of activity in making investments for our own account or in sponsoring investment vehicles, all of which is largely within our discretion.
Dividends
We used our cash reserves to fund dividend payments during the quarter ended June 30, 2013 as cash flows from operations were insufficient.
For the six months ended June 30, 2014 and 2013, we paid cash dividends of $2.0 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 June 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)
$
10,189

 
$
206

 
$
449

 
$
513

 
$
9,021

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

 
10,000

 
—

 
—

 
—

Capital lease obligations (1) 
369

 
236

 
133

 
—

 
—

 
10,369

 
10,236

 
133

 
—

 
—

 
 
 
 
 
 
 
 
 
 
Operating lease obligations
14,438

 
2,120

 
4,217

 
3,896

 
4,205

Other long-term liabilities
6,860

 
831

 
1,576

 
1,459

 
2,994

Total contractual obligations
$
41,856

 
$
13,393

 
$
6,375

 
$
5,868

 
$
16,220

 
(1)
Not included in the table above are estimated interest payments calculated at rates in effect at June 30, 2014 - less than 1 year: $1.3 million; 1-3 years:  $1.3 million; 3-5 years:  $1.2 million; and after 5 years: $1.4 million.
 
 
 
Amount of Commitment Expiration Per Period
 
Total
 
Less than
1 Year
 
1 – 3
Years
 
3 – 5
Years
 
After
5 Years
Other commercial commitments:
 
 
 
 
 
 
 
 
 
Guarantees
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Real estate commitments
800

 
800

 
—

 
—

 
—

Standby letters of credit
803

 
803

 
—

 
—

 
—

Total commercial commitments
$
1,603

 
$
1,603

 
$
—

 
$
—

 
$
—


    

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Limited Loan Guarantee. We and Lease Equity Appreciation Fund I, L.P. (“LEAF I”), one of our sponsored commercial finance investment partnerships, had provided a limited guarantee to a lender to the LEAF partnership in exchange for a waiver of any existing defaulted loan covenants and certain future financial covenants. On March 20, 2014, pursuant to the guarantee, we paid $954,000 to the lender on behalf of LEAF I to pay off the remaining loan balance and became subrogated to the lender's position on the loan.
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 June 30, 2014 and December 31, 2013, respectively.  As of June 30, 2014 and December 31, 2013, Resource Securities net capital was $1.2 million and $2.7 million, respectively, which exceeded the minimum requirements by $1.1 million and $2.5 million, respectively.
Legal proceedings. We are also a party to various routine legal proceedings arising out of the ordinary course of business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our consolidated financial condition or operations.
Real Estate Commitments. As a specialized asset manager, we sponsor investment funds in which we may make an equity investment along with outside investors. This equity investment is generally based on a percentage of funds raised and varies among investment programs. With respect to RRE Opportunity REIT II, we are committed to invest 1% of the first $100.0 million of equity raised. During 2013, we invested $200,000. In April 2014, we funded an additional $1.0 million, for a total investment of $1.2 million.
General Corporate Commitments. We are also a party to employment agreements with certain executives that provide for compensation and other benefits, including severance payments under specified circumstances.
As of June 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 six months ended June 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.
In March 2014, we made a payment under a guarantee on behalf of LEAF I, which is a VIE that we do not consolidate. As a result of the payment, we re-evaluated LEAF I for consolidation and determined to exclude it on the basis of immateriality to our consolidated financial statements.
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 June 30, 2014.


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Critical Accounting Policies
     The discussion and analysis of our financial condition and results of operations are based upon our restated consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues, costs and expenses, and related disclosure of contingent assets and liabilities. We make estimates of our allowance for credit losses, the valuation allowance against our deferred tax assets, discounts and collectability of management fees, the valuation of stock-based compensation, and in determining whether a decrease in the fair value of an investment is an other-than-temporary impairment. The financial fund management segment makes assumptions in determining the fair value of our investments in securities. 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.     

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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 June 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 June 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 June 30, 2014, our trading security portfolio was comprised of $4.5 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 June 30, 2014, the hypothetical loss would have been approximately $452,000.
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 June 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.



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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 June 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
April 2014
 
—

 
$
—

 
—

 
1,000,000

May 2014
 
175,000

 
$
8.80

 
175,000

 
825,000

June 2014
 
58,891

 
$
9.22

 
233,891

 
766,109

 
 
233,891

 
$
8.91

 
 
 
 
 
(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)
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)

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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 8, 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.

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(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.

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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)
 
 
 
August 11, 2014
By:
/s/ Thomas C. Elliott
 
 
THOMAS C. ELLIOTT
 
 
Senior Vice President and Chief Financial Office
 
 
 
August 11, 2014
By:
/s/ Arthur J. Miller
 
 
ARTHUR J. MILLER
 
 
Vice President and Chief Accounting Officer


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REXI.2014.06.30-EX31.1
EXHIBIT 31.1

CERTIFICATION

I, Jonathan Z. Cohen, certify that:

1)
I have reviewed this report on Form 10-Q for the quarter ended June 30, 2014 of Resource America, Inc.;
2)
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3)
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4)
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5)
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 
 
/s/ Jonathan Z. Cohen
Date:
August 11, 2014
Jonathan Z. Cohen
 
 
Chief Executive Officer


REXI.2014.06.30-EX31.2
EXHIBIT 31.2

CERTIFICATION

I, Thomas C. Elliott, certify that:

1)
I have reviewed this report on Form 10-Q for the quarter ended June 30, 2014 of Resource America, Inc.;
2)
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3)
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4)
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5)
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
/s/ Thomas C. Elliott
Date:
August 11, 2014
Thomas C. Elliott
 
 
Senior Vice President and Chief Financial Officer

REXI.2014.06.30-EX32.1
EXHIBIT 32.1


CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Quarterly Report of Resource America, Inc. (the "Company") on Form 10-Q for the quarter ended June 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jonathan Z. Cohen, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
/s/ Jonathan Z. Cohen
Date:
August 11, 2014
Jonathan Z. Cohen
 
 
Chief Executive Officer


REXI.2014.06.30-EX32.2
EXHIBIT 32.2


CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Resource America, Inc. (the "Company") on Form 10-Q for the quarter ended June 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas C. Elliott, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
/s/ Thomas C. Elliott
Date:
August 11, 2014
Thomas C. Elliott
 
 
Senior Vice President and Chief Financial Officer


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rexi-20140630.xsd
Attachment: XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT

rexi-20140630_cal.xml
Attachment: XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT

rexi-20140630_def.xml
Attachment: XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT

rexi-20140630_lab.xml
Attachment: XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT

rexi-20140630_pre.xml
Attachment: XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT