10-Q 1 tfi2q201610q.htm 10-Q Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
 
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly period ended June 30, 2016
OR
o
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: 001-33549
Tiptree Financial Inc.
(Exact name of Registrant as Specified in Its Charter)
Maryland
 
38-3754322
(State or Other Jurisdiction of
 
(IRS Employer
Incorporation of Organization)
 
Identification No.)
 
 
 
 
 
 
780 Third Avenue, 21st Floor, New York, New York
 
10017
(Address of Principal Executive Offices)
 
(Zip Code)
(212) 446-1400
(Registrant’s Telephone Number, Including Area Code)
Not applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 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   x     No  ¨
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Yes   x     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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨                    Accelerated filer x
Non-accelerated filer ¨                    Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No  x
As of August 2, 2016, there were 34,874,371 shares, par value $0.001, of the registrant’s Class A common stock outstanding (including 5,596,000 shares of Class A common stock held by subsidiaries of the registrant) and 8,049,029 shares, par value $0.001, of the registrant’s Class B common stock outstanding.






Tiptree Financial Inc.
Quarterly Report on Form 10-Q
June 30, 2016
Table of Contents
ITEM
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. FINANCIAL INFORMATION

Forward-Looking Statements

Except for the historical information included and incorporated by reference in this Quarterly Report on Form 10-Q, the information included and incorporated by reference herein are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements provide our current expectations or forecasts of future events and are not statements of historical fact. These forward-looking statements include information about possible or assumed future events, including, among other things, discussion and analysis of our future financial condition, results of operations and our strategic plans and objectives. When we use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “seek,” “may,” “might,” “plan,” “project,” “should,” “target,” “will,” or similar expressions, we intend to identify forward-looking statements.

Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, many of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those described in the section entitled “Risk Factors” in our Annual Report on Form 10-K.
 
The factors described herein are not necessarily all of the important factors that could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements.  Other unknown or unpredictable factors also could affect our forward-looking statements. Consequently, our actual performance could be materially different from the results described or anticipated by our forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by the applicable law, we undertake no obligation to update any forward-looking statements.

Note to Reader

In reading this Quarterly Report on Form 10-Q, references to:

“1940 Act” means the Investment Company Act of 1940, as amended.
“Administrative Services Agreement” means the Administrative Services Agreement between Operating Company (as assignee of TFP) and BackOffice Services Group, Inc., dated as of June 12, 2007.
“AUM” means assets under management.
“Care” means Care Inc. and Care LLC, collectively.
“Care LLC” means Care Investment Trust LLC.
“CFPB” means the Consumer Financial Protection Bureau.
“CLOs” means collateralized loan obligations.
“Code” means the Internal Revenue Code of 1986, as amended.
“Consolidated CLOs” means Telos 5, Telos 6 and Telos 7.
“Contribution Transactions” means the closing on July 1, 2013 of the transactions pursuant to the Contribution Agreement by and between the Company, Operating Company and TFP, dated as of December 31, 2012.
“Dodd-Frank Act” means the Dodd-Frank Wall Street Reform and Consumer Protection Act.
“EBITDA” means earnings before interest, taxes, depreciation and amortization.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Fortress” means Fortress Credit Corp., as administrative agent, collateral agent and lead arranger, and affiliates of Fortress that are lenders under the Credit Agreement among the Company, Fortress and the lenders party thereto.
“Fortegra” means Fortegra Financial Corporation.
“GAAP” means U.S. generally accepted accounting principles.
“Gramm-Leach-Bliley Act” means the Gramm-Leach-Bliley Act of 1999.
“Greenfield” means Greenfield Holdings, LLC.
“HIPAA” means the Health Insurance Portability and Accountability Act of 1996.
“Luxury” means Luxury Mortgage Corp.
“Mariner” means Mariner Investment Group LLC.
“MCM” means Muni Capital Management, LLC.
“MFCA” means Muni Funding Company of America LLC.
“NAIC” means the National Association of Insurance Commissioners.
“NPL” means nonperforming residential real estate mortgage loans.
“NPPF I” means Non-Profit Preferred Funding Trust I.
“Operating Company” means Tiptree Operating Company, LLC.
“PFAS” means Philadelphia Financial Administration Services Company, LLC.
“PFG” means Philadelphia Financial Group, Inc.
“RAIT” means RAIT Financial Trust.
“Reliance” means Reliance First Capital, LLC.
“REO” means real estate owned.
“Royal” means Royal Senior Care Management LLC.
“SEC” means the U.S. Securities and Exchange Commission.
“Securities Act” means the Securities Act of 1933, as amended.
“Seneca” means Seneca Mortgage Servicing LLC.
“Siena” means Siena Capital Finance LLC.
“Star Asia Entities” means collectively Star Asia Finance, Limited, Star Asia Opportunity, LLC, Star Asia Opportunity II, LLC and Star Asia SPV, LLC.
“Synovus” means Synovus Bank.
“TAMCO” means Tiptree Asset Management Company, LLC.
“TDH” means Tiptree Direct Holdings LLC.
“Telos” means Telos Asset Management, LLC.
“Telos 1” means Telos CLO 2006-1, Ltd.
“Telos 2” means Telos CLO 2007-2, Ltd.
“Telos 3” means Telos CLO 2013-3, Ltd.
“Telos 4” means Telos CLO 2013-4, Ltd.
“Telos 5” means Telos CLO 2014-5, Ltd.
“Telos 6” means Telos CLO 2014-6, Ltd.
“Telos 7” means Telos CLO 2016-7, Ltd.
“TFP” means Tiptree Financial Partners, L.P.
“Tiptree”, the “Company”, “we”, “its”, “us” and “our” means, unless otherwise indicated by the context, Tiptree Financial Inc. and its consolidated subsidiaries.
“Transition Services Agreement” means the Transition Services Agreement among TAMCO, Tricadia and Operating Company (as assignee of TFP), dated as of June 30, 2012.
“Tricadia” means Tricadia Holdings, L.P.



F-1



TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)

Item 1. Financial Statements (Unaudited)
 
As of

June 30, 2016
 
December 31, 2015
Assets
(Unaudited)
 

Cash and cash equivalents
$
56,181

 
$
69,400

Restricted cash
15,062

 
18,778

Securities, available for sale (amortized cost: $161,172 at June 30, 2016 and $185,046 at December 31, 2015)
165,025

 
184,703

Loans, at fair value (pledged as collateral: $112,858 at June 30, 2016 and $112,743 at December 31, 2015)
278,834

 
394,395

Loans owned, at amortized cost, net
75,562

 
52,531

Notes and accounts receivable, net
160,391

 
140,999

Reinsurance receivables
376,649

 
352,926

Deferred acquisition costs
57,563

 
57,858

Real estate, net
255,288

 
203,961

Goodwill and intangible assets, net
178,963

 
186,107

Other assets
95,120

 
104,500

Assets of consolidated CLOs
989,615

 
728,812

Total assets
$
2,704,253


$
2,494,970

Liabilities and Stockholders’ Equity
 
 
 
Liabilities
 
 
 
Debt, net
$
655,233

 
$
666,952

Unearned premiums
405,519

 
389,699

Policy liabilities and unpaid claims
97,611

 
80,663

Deferred revenue
57,039

 
63,081

Reinsurance payable
59,168

 
65,840

Commissions payable
15,574

 
14,866

Deferred tax liabilities, net
23,415

 
22,699

Other liabilities and accrued expenses
73,862

 
95,160

Liabilities of consolidated CLOs
936,367

 
698,316

Total liabilities
$
2,323,788

 
$
2,097,276

Commitments and contingencies (see Note 23)

 

Stockholders’ Equity
 
 
 
Preferred stock: $0.001 par value, 100,000,000 shares authorized, none issued or outstanding
$

 
$

Common stock - Class A: $0.001 par value, 200,000,000 shares authorized, 34,853,996 and 34,899,833 shares issued and outstanding, respectively
35

 
35

Common stock - Class B: $0.001 par value, 50,000,000 shares authorized, 8,049,029 and 8,049,029 shares issued and outstanding, respectively
8

 
8

Additional paid-in capital
296,428

 
297,063

Accumulated other comprehensive income (loss), net of tax
1,667

 
(111
)
Retained earnings
25,785

 
15,845

Class A common stock held by subsidiaries, 5,596,000 and 0 shares, respectively
(36,374
)
 

Class B common stock held by subsidiaries, 8,049,029 and 0 shares, respectively
(8
)
 

Total stockholders’ equity to Tiptree Financial Inc.
287,541


312,840

Non-controlling interests (including $73,586 and $69,278 attributable to Tiptree Financial Partners, L.P., respectively)
92,924

 
84,854

Total stockholders’ equity
380,465

 
397,694

Total liabilities and stockholders’ equity
$
2,704,253

 
$
2,494,970



See accompanying notes to consolidated financial statements.

F-2



TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(in thousands, except share data)


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Net realized and unrealized gains (losses)
$
7,381

 
$
462

 
$
13,558

 
$
364

Interest income
6,165

 
3,444

 
13,850

 
6,327

Service and administrative fees
28,269

 
25,545

 
58,579

 
47,472

Ceding commissions
10,545

 
10,148

 
21,248

 
20,085

Earned premiums, net
46,292

 
39,707

 
90,907

 
77,060

Gain on sale of loans held for sale, net
14,852

 
3,941

 
28,367

 
6,672

Loan fee income
3,047

 
1,882

 
5,381

 
3,281

Rental revenue
13,511

 
11,191

 
26,235

 
20,560

Other income
3,690

 
4,708

 
7,433

 
8,270

Total revenues
133,752

 
101,028

 
265,558

 
190,091

Expenses:
 
 
 
 
 
 
 
Interest expense
6,451

 
6,194

 
12,931

 
11,323

Payroll and employee commissions
32,800

 
23,429

 
63,408

 
43,770

Commission expense
34,836

 
23,927

 
67,874

 
40,455

Member benefit claims
5,617

 
8,240

 
11,367

 
15,819

Net losses and loss adjustment expense
17,240

 
12,926

 
35,188

 
25,376

Professional fees
7,340

 
3,671

 
14,702

 
8,299

Depreciation and amortization
7,085

 
11,359

 
15,462

 
26,823

Acquisition and transaction costs

 

 
383

 
1,349

Other expenses
16,249

 
12,929

 
34,239

 
24,073

Total expenses
127,618

 
102,675

 
255,554

 
197,287

Results of consolidated CLOs:
 
 
 
 
 
 
 
Income attributable to consolidated CLOs
14,480

 
8,543

 
22,157

 
17,593

Expenses attributable to consolidated CLOs
9,568

 
8,476

 
16,140

 
17,837

Net income (loss) attributable to consolidated CLOs
4,912

 
67

 
6,017

 
(244
)
Income (loss) before taxes from continuing operations
11,046

 
(1,580
)
 
16,021

 
(7,440
)
Less: provision (benefit) for income taxes
4,025

 
(371
)
 
1,586

 
(1,867
)
Income (loss) from continuing operations
7,021

 
(1,209
)
 
14,435

 
(5,573
)
Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations, net

 
4,654

 

 
6,999

Gain on sale of discontinued operations, net

 
16,349

 

 
16,349

Discontinued operations, net

 
21,003

 

 
23,348

Net income (loss) before non-controlling interests
7,021

 
19,794

 
14,435

 
17,775

Less: net income (loss) attributable to non-controlling interests - Tiptree Financial Partners, L.P.
669

 
4,735

 
3,298

 
3,875

Less: net income (loss) attributable to non-controlling interests - Other
219

 
97

 
(551
)
 
(83
)
Net income (loss) available to Class A common stockholders
$
6,133

 
$
14,962

 
$
11,688

 
$
13,983

 
 
 
 
 
 
 
 
Net income (loss) per Class A common share:
 
 
 
 
 
 
 
Basic, continuing operations, net
$
0.18

 
$
(0.03
)
 
$
0.33

 
$
(0.11
)
Basic, discontinued operations, net

 
0.50

 

 
0.55

Basic earnings per share
0.18

 
0.47

 
0.33

 
0.44

 
 
 
 
 
 
 
 
Diluted, continuing operations, net
0.17

 
(0.03
)
 
0.33

 
(0.11
)
Diluted, discontinued operations, net

 
0.50

 

 
0.55

Diluted earnings per share
$
0.17

 
$
0.47

 
$
0.33

 
$
0.44

 
 
 
 
 
 
 
 
Weighted average number of Class A common shares:
 
 
 
 
 
 
 
Basic
34,456,096

 
31,881,904

 
34,716,291

 
31,962,065

Diluted
34,528,977

 
31,881,904

 
34,806,741

 
31,962,065


See accompanying notes to consolidated financial statements.

F-3



TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands)



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net income (loss) before non-controlling interests
$
7,021

 
$
19,794

 
$
14,435

 
$
17,775

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale securities:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
1,673

 
(2,292
)
 
4,332

 
(645
)
Related tax (expense) benefit
(591
)
 
808

 
(1,529
)
 
223

Reclassification of (gains) losses included in net income
(83
)
 
56

 
(140
)
 
41

Related tax expense (benefit)
29

 
(19
)
 
49

 
(14
)
Unrealized gains (losses) on available-for-sale securities, net of tax
1,028

 
(1,447
)
 
2,712

 
(395
)
 
 
 
 
 
 
 
 
Interest rate swaps (cash flow hedges):
 
 
 
 
 
 
 
Unrealized (losses) on interest rate swaps
(535
)
 
(55
)
 
(671
)
 
(289
)
Related tax benefit
157

 
19

 
204

 
101

Reclassification of (gains) losses included in net income
91

 
283

 
(228
)
 
564

Related tax expense (benefit)
(28
)
 
(99
)
 
84

 
(197
)
Unrealized (losses) gains on interest rate swaps from cash flow hedges, net of tax
(315
)
 
148

 
(611
)
 
179

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
713

 
(1,299
)
 
2,101

 
(216
)
Comprehensive income
7,734

 
18,495

 
16,536

 
17,559

Less: Comprehensive income (loss) attributable to non-controlling interests - Tiptree Financial Partners, L.P.
1,054

 
4,735

 
3,683

 
3,875

Less: Comprehensive income (loss) attributable to non-controlling interests - Other
157

 
97

 
(613
)
 
(83
)
Total comprehensive income available to common stockholders
$
6,523

 
$
13,663

 
$
13,466

 
$
13,767























See accompanying notes to consolidated financial statements.

F-4





TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(in thousands, except shares)




 
Number of Shares
 
Par Value
 
Additional paid in capital
 
Accumulated
other
comprehensive
income (loss)
 
Retained
earnings
 
Common Stock held by subsidiaries
 
Total stockholders’ equity to Tiptree Financial Inc.
 
Non-controlling
interests - Tiptree Financial Partners, L.P.
 
Non-controlling
interests - Other
 
Total stockholders' equity
 
Class A
 
Class B
 
Class A
 
Class B
 
 
 
 
Class A Shares
 
Class A Amount
 
Class B Shares
 
Class B Amount
 
 
 
 
Balance at December 31, 2015
34,899,833

 
8,049,029

 
$
35

 
$
8

 
$
297,063

 
$
(111
)
 
$
15,845

 

 
$

 

 
$

 
$
312,840

 
$
69,278

 
$
15,576

 
$
397,694

Stock-based compensation to directors, employees and other persons for services rendered
169,521

 

 

 

 
1,526

 

 

 

 

 

 

 
1,526

 

 

 
1,526

Other comprehensive income, net of tax

 

 

 

 

 
1,778

 

 

 

 

 

 
1,778

 
385

 
(62
)
 
2,101

Non-controlling interest contributions

 

 

 

 

 

 

 

 

 

 

 

 

 
5,150

 
5,150

Non-controlling interest distributions

 

 

 

 

 

 

 

 

 

 

 

 
(402
)
 
(557
)
 
(959
)
Shares retired under stock purchase plan
(215,358
)
 

 

 

 
(1,230
)
 

 

 

 

 

 

 
(1,230
)
 

 

 
(1,230
)
Shares acquired by subsidiaries

 

 

 

 

 

 

 
(5,596,000
)
 
(36,374
)
 
(8,049,029
)
 
(8
)
 
(36,382
)
 

 

 
(36,382
)
Net changes in non-controlling interest

 

 

 

 
(931
)
 

 

 

 

 

 

 
(931
)
 
1,027

 
(218
)
 
(122
)
Dividends declared

 

 

 

 

 

 
(1,748
)
 

 

 

 

 
(1,748
)
 

 

 
(1,748
)
Net income (loss)

 

 

 

 

 

 
11,688

 

 

 

 

 
11,688

 
3,298

 
(551
)
 
14,435

Balance at June 30, 2016
34,853,996

 
8,049,029

 
$
35

 
$
8

 
$
296,428

 
$
1,667

 
$
25,785

 
(5,596,000
)
 
$
(36,374
)
 
(8,049,029
)
 
$
(8
)

$
287,541


$
73,586


$
19,338


$
380,465







See accompanying notes to consolidated financial statements.

F-5



TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)


 
Six months ended June 30,
 
2016
 
2015
 
 
 
 
Operating activities:
 
 
 
Net income (loss) available to common stockholders
$
11,688

 
$
13,983

Net income (loss) attributable to non-controlling interests - Tiptree Financial Partners, L.P.
3,298

 
3,875

Net income (loss) attributable to non-controlling interests - Other
(551
)
 
(83
)
Net income (loss)
14,435

 
17,775

Discontinued operations, net

 
(23,348
)
Adjustments to reconcile net income to net cash provided by (used in) operating activities from continuing operations:
 
 
 
Net realized and unrealized (gains) losses
(13,558
)
 
(364
)
Net unrealized loss (gain) on interest rate swaps
1,364

 

Change in fair value of contingent consideration
(212
)
 

Non cash compensation expense
1,028

 
228

Amortization/accretion of premiums and discounts
774

 
1,320

Depreciation and amortization expense
15,462

 
26,823

Provision for doubtful accounts
892

 
105

Amortization of deferred financing costs
839

 
700

(Gain) loss on sale of loans held for sale
(28,367
)
 
(6,672
)
Deferred tax expense (benefit)
(3,412
)
 
(11,156
)
Changes in operating assets and liabilities:
 
 
 
Mortgage loans originated for sale
(723,240
)
 
(379,349
)
Proceeds from the sale of mortgage loans originated for sale
749,395

 
358,498

(Increase) decrease in notes and accounts receivable
(16,859
)
 
(20,438
)
(Increase) decrease in reinsurance receivables
(23,723
)
 
(35,289
)
(Increase) decrease in deferred acquisition costs
295

 
(34,744
)
(Increase) decrease in other assets
2,836

 
(2,992
)
Increase (decrease) in unearned premiums
15,820

 
33,734

Increase (decrease) in policy liabilities and unpaid claims
16,948

 
6,273

Increase (decrease) in deferred revenue
(6,303
)
 
19,612

Increase (decrease) in reinsurance payable
(6,672
)
 
33,707

Increase (decrease) in commissions payable
708

 
(6,079
)
Increase (decrease) in other liabilities and accrued expenses
(363
)
 
2,342

Operating activities from consolidated CLOs
(4,027
)
 
11,642

Net cash provided by (used in) operating activities - continuing operations
(5,940
)
 
(7,672
)
Net cash provided by (used in) operating activities - discontinued operations

 
(6,198
)
Net cash provided by (used in) operating activities
(5,940
)
 
(13,870
)
Investing Activities:
 
 
 
Purchases of investments
(99,695
)
 
(76,275
)
Proceeds from sales and maturities of investments
97,759

 
22,452

(Increase) decrease in loans owned, at amortized cost, net
(23,251
)
 
(15,485
)
Purchases of real estate capital expenditures
(3,109
)
 
(1,519
)
Purchases of corporate fixed assets
(572
)
 
(2,227
)
Proceeds from the sale of subsidiaries

 
142,837

Proceeds from notes receivable
16,092

 
16,228

Issuance of notes receivable
(19,297
)
 
(16,136
)
(Increase) decrease in restricted cash
3,716

 
(2,087
)
Business and asset acquisitions, net of cash and deposits
(52,729
)
 
(81,710
)
Distributions from equity method investments

 
2,275

Investing activities from consolidated CLOs
(98,436
)
 
33,428

Net cash provided by (used in) investing activities - continuing operations
(179,522
)
 
21,781

Net cash provided by (used in) investing activities from discontinued operations

 
11,866

Net cash provided by (used in) investing activities
(179,522
)
 
33,647

 
 
 
 
Financing Activities:
 
 
 

F-6                    (continued)

TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(in thousands)


 
Six months ended June 30,
 
2016
 
2015
Dividends paid
(1,748
)
 
(1,604
)
Non-controlling interest contributions
2,930

 
2,229

Non-controlling interest distributions
(959
)
 
(715
)
Change in non-controlling interest

 
(3,000
)
Payment of debt issuance costs
(722
)
 
(1,839
)
Proceeds from borrowings and mortgage notes payable
860,366

 
499,920

Principal paydowns of borrowings and mortgage notes payable
(872,063
)
 
(398,835
)
Repurchases of common stock
(37,604
)
 
(2,393
)
Financing activities from consolidated CLOs
222,043

 
8,573

Net cash provided by (used in) financing activities - continuing operations
172,243

 
102,336

Net cash provided by (used in) financing activities - discontinued operations

 
(5,000
)
Net cash provided by (used in) financing activities
172,243

 
97,336

Net increase (decrease) in cash and cash equivalents
(13,219
)
 
117,113

Cash and cash equivalents – beginning of period - continuing operations
69,400

 
52,987

Cash and cash equivalents of continuing operations – end of period
$
56,181

 
$
170,100

 
 
 
 
Supplemental Schedule of Non-Cash Investing and Financing Activities:
 
 
 
Acquiring real estate properties through, or in lieu of, foreclosure of the related loan
$
5,761

 
$
60























See accompanying notes to consolidated financial statements.

F-7



TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016
(in thousands, except share data)


(1) Organization

Tiptree Financial Inc. (together with its consolidated subsidiaries, collectively, Tiptree or the Company, or we) is a Maryland Corporation that was incorporated on March 19, 2007. Tiptree is a diversified holding company with five reporting segments: insurance and insurance services, specialty finance, real estate, asset management, and corporate and other. Tiptree’s Class A Common Stock is traded on the NASDAQ Capital Market under the symbol “TIPT”. Tiptree’s primary asset is its ownership of Tiptree Financial Partners, L.P. (TFP). Tiptree reports a non-controlling interest representing the economic interest in TFP held by other limited partners of TFP.

As of December 31, 2015, Tiptree owned, directly or indirectly, approximately 81% of the assets of Tiptree Operating Company, LLC (Operating Company) with the remaining 19% held by non-controlling shareholders through their interests in TFP. Effective January 1, 2016, Tiptree, TFP and Operating Company created a consolidated group among themselves and various Operating Company subsidiaries for U.S. federal income tax purposes, with Tiptree being the parent company. In connection with the creation of the consolidated group, TFP and the Operating Company elected to be treated as corporations for U.S. federal income tax purposes, and Tiptree contributed its interest in Operating Company to TFP in exchange for additional common units of TFP. As a result of these steps, as of January 1, 2016, Tiptree directly owns approximately 81% of TFP and TFP directly owns 100% of Operating Company. There was no change to the relative economic position of the parties to the transactions as a result of this reorganization. See Note—(22) Income Taxes.
All of Tiptree’s Class B common stock is owned by TFP and is accounted for as treasury stock. Tiptree’s Class B common stock has voting but no economic rights. The limited partners of TFP (other than Tiptree itself) have the ability to exchange TFP partnership units for Tiptree Class A common stock at a rate of 2.798 shares of Class A common stock per partnership unit. For every Class A common stock exchanged in this manner, a share of Class B common stock is canceled. The percentage of TFP (and therefore Operating Company) owned by Tiptree may increase in the future to the extent TFP’s limited partners choose to exchange their limited partnership units of TFP for Class A common stock of Tiptree. Changes in Tiptree’s ownership of TFP will be accounted for as equity transactions, which increase Tiptree’s ownership of TFP and reduce non-controlling interest in TFP without changing total stockholders’ equity of Tiptree.

(2) Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements of Tiptree have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) and include the accounts of the Company and its controlled subsidiaries. The consolidated financial statements are presented in U.S. dollars, the main operating currency of the Company. The unaudited consolidated financial statements presented herein should be read in conjunction with the annual audited financial statements included in the Company’s Form 10-K for the fiscal year ended December 31, 2015. In the opinion of management, the accompanying unaudited interim financial information reflects all adjustments, including normal recurring adjustments necessary to present fairly the Company’s financial position, results of operations, comprehensive income and cash flows for each of the interim periods presented. The results of operations for the three months and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the full year ending on December 31, 2016.

Tiptree consolidates those entities in which it has an investment of 50% or more of voting rights or has control over significant operating, financial and investing decisions of the entity as well as those entities deemed to be variable interest entities (VIEs) in which Tiptree is determined to be the primary beneficiary. VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity risk for the entity to finance its activities without additional subordinated financial support from other parties.

A VIE is required to be consolidated only by its primary beneficiary, which is defined as the party who has the power to direct the activities of a VIE that most significantly impact its economic performance and who has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. Generally, Tiptree’s consolidated VIEs are entities which Tiptree is considered the primary beneficiary through its controlling financial interests.

Non-controlling interests on the Consolidated Statements of Operations represent the ownership interests in certain consolidated subsidiaries held by entities or persons other than Tiptree. Accounts and transactions between consolidated entities have been eliminated.

F-8



TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016
(in thousands, except share data)


The Company’s Consolidated Statements of Cash Flows for the six months ended June 30, 2015 have been revised for immaterial corrections and errors related to the presentation of our activities from Discontinued Operations and business acquisitions. These corrections resulted in an increase in cash provided by investing activities of approximately $3,000, a decrease in cash provided by financing activities of approximately $3,000, and an adjustment of approximately $28,400 to reflect cash of a disposed business and investing activities. Such changes had no impact on the ending cash balance as of June 30, 2015. In addition, certain prior period amounts have been reclassified to conform to the current year presentation.

See “Item 4. Controls and Procedures” for actions the Company is taking to remediate certain material weaknesses as of June 30, 2016, and to enhance its control infrastructure as a result.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. Management makes estimates and assumptions that include but are not limited to the determination of the following significant items:

Fair value of financial assets and liabilities, including, but not limited to, securities, loans and derivatives
Value of acquired assets and liabilities
Carrying value of goodwill and other intangibles, including estimated amortization period and useful lives
Reserves for unpaid losses and loss adjustment expenses, estimated future claims and losses, potential litigation and other claims
Valuation of contingent share issuances for compensation and purchase consideration, including estimates of number of shares and vesting schedules
Revenue recognition including, but not limited to, the timing and amount of insurance premiums, service, administration fees, and loan origination fees and
Other matters that affect the reported amounts and disclosure of contingencies in the consolidated financial statements

Although these and other estimates and assumptions are based on the best available estimates, actual results could differ materially from management’s estimates.

Business Combination Accounting

The Company accounts for business combinations by applying the acquisition method of accounting. The acquisition method requires, among other things, that the assets acquired and liabilities assumed in a business combination be measured at fair value as of the closing date of the acquisition. The net assets acquired may consist of tangible and intangible assets and the excess of purchase price over the fair value of identifiable net assets acquired, or goodwill. The determination of estimated useful lives and the allocation of the purchase price to the intangible assets requires significant judgment and affects the amount of future amortization and possible impairment charges. Contingent consideration, if any, is measured at fair value on the date of acquisition. The fair value of any contingent consideration liability is remeasured at each reporting date with any change recorded in other income in the Consolidated Statements of Operations. Acquisition and transaction costs are related primarily to completed and potential business combinations and include advisory, legal, accounting, valuation and other professional or consulting fees which are expensed as incurred.

In certain instances, the Company may acquire less than 100% ownership of an entity, resulting in the recording of a non-controlling interest. The measurement of assets and liabilities acquired and non-controlling interest is initially established at a preliminary estimate of fair value, which may be adjusted during the measurement period based upon the results of a valuation study applicable to the business combination.


F-9



TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016
(in thousands, except share data)

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels, from highest to lowest, are defined as follows:

Level 1 – Unadjusted, quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 – Significant inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability. The types of financial assets and liabilities carried at level 2 are valued based on one or more of the following:

a) Quoted prices for similar assets or liabilities in active markets;
b) Quoted prices for identical or similar assets or liabilities in nonactive markets;
c) Pricing models whose inputs are observable for substantially the full term of the asset or liability;
d) Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.

Level 3 – Significant inputs that are unobservable inputs for the asset or liability, including the Company’s own data and assumptions that are used in pricing the asset or liability.

Fair Value Option

In addition to the financial instruments the Company is required to value at fair value, the Company has elected to make an irrevocable election of fair value as the initial and subsequent measurement attribute for certain eligible financial assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are reported in Net realized and unrealized gains (losses) within the Consolidated Statements of Operations. The decision to elect the fair value option is determined on an instrument-by-instrument basis and must be applied to an entire instrument and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to this guidance are reported separately in our Consolidated Balance Sheets from those instruments using another accounting method.

Recent Accounting Standards

Recently Adopted Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. These amendments change the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. In addition, ASU 2014-08 requires expanded disclosures about discontinued operations that will provide financial statement users with more information. ASU 2014-08 is effective for the first quarter of 2015 for the Company. The effects of applying the revised guidance will vary based upon the nature and size of future disposal transactions. It is expected that fewer disposal transactions will meet the new criteria to be reported as discontinued operations. The adoption of ASU 2014-08 did not have an impact on the Company's consolidated financial position, results of operations and cash flows.

In June 2014, the FASB issued ASU 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. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period shall be treated as a performance condition. The adoption of this standard did not have an impact on its Consolidated Balance Sheets, results of operations or cash flows.


F-10



TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016
(in thousands, except share data)

In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. The pronouncement eliminates the concept of extraordinary items from GAAP. However, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. ASU 2015-01 will be effective for the annual and interim periods beginning after December 15, 2015 with early adoption permitted. The adoption of this standard did not have an impact on the Company’s Consolidated Balance Sheets, results of operations or cash flows.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability and consistent with debt discounts. ASU 2015-03 requires retrospective adoption and was effective for the Company on January 1, 2016. Accordingly “Debt, net” is reported net of deferred financing costs as of June 30, 2016 and December 31, 2015, respectively, in the Consolidated Balance Sheets. See Note—(16) Debt, net.

In April 2015, the FASB issued ASU 2015-05, Intangibles -Goodwill and Other -Internal-Use Software (Subtopic 350-40) which will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance as to whether an arrangement includes the sale or license of software.  The adoption of this standard did not have an impact on the Company’s Consolidated Balance Sheets, results of operations and cash flows.

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which eliminates the requirement for entities to categorize within the fair value hierarchy investments for which fair values are measured at net asset value (NAV) per share (FASB ASC Subtopic 820-10). ASU 2015-07 also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the NAV per share practical expedient, instead limiting disclosures to investments for which the entity has elected the expedient. ASU 2015-07 was effective for the Company on January 1, 2016 and retrospective adoption is required. The adoption of this standard did not have an impact on the Company’s Consolidated Balance Sheets, results of operations or cash flows.

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements, which covers a wide range of Topics in the Codification. The amendments in ASU 2015-10 represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost on most entities. Amendments with transition guidance were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. All other amendments are effective upon the ASU’s issuance (June 12, 2015). The adoption of this standard did not have a material impact on the Company’s Consolidated Balance Sheets, results of operations or cash flows.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this standard affects any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This standard was originally effective for the Company on January 1, 2017.

On July 9, 2015, the FASB decided to delay the effective date of ASU 2014-09 by one year. Reporting entities may choose to adopt the standard as of the original effective date. The deferral results in ASU 2014-09 being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently reviewing ASU 2014-09 and is assessing the potential effects on its consolidated financial position, results of operations and cash flows.

In May 2015, the FASB issued ASU 2015-09, Financial Services—Insurance (Topic 944): Disclosures about Short-Duration Contracts, which expands the disclosure requirements for insurance companies that issue short-duration contracts (typically one year or less) to provide users with additional disclosures about the liability for unpaid claims and claim adjustment expenses and to increase the transparency of the significant estimates management makes in measuring those liabilities. In addition, the disclosures will serve to increase insight into an insurance entity’s ability to underwrite and anticipate costs associated with claims as well as provide users of the financial statements a better understanding of the amount and uncertainty of cash flows arising from insurance liabilities, the nature and extent of risks on short-duration contracts and the timing of cash flows arising

F-11



TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016
(in thousands, except share data)

from insurance liabilities. ASU 2015-09 will be effective for the Company for the annual period beginning after December 15, 2015, and for interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the effect upon its 2016 annual financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which makes targeted improvements to the recognition, measurement, presentation and disclosure of certain financial instruments. ASU 2016-01 focuses primarily on the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for certain financial instruments. Among its provisions for public business entities, ASU 2016-01 eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost, requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires the separate presentation in other comprehensive income of the change in fair value of a liability due to instrument-specific credit risk for a liability for which the reporting entity has elected the fair value option, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) and clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted for a limited number of provisions. The Company is currently evaluating the effect on its financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 supersedes the previous leases standard, Leases (Topic 840). The standard is effective on January 1, 2019, with early adoption permitted. The Company is in the process of evaluating the impact the adoption of ASU 2016-02 will have on our financial position or results of operations.

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships which clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815, does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company is currently evaluating the effect upon its financial statements.

In March 2016, the FASB issued ASU 2016-07, Investments -Equity Method and Joint Ventures (Topic 323) which eliminates the requirement in Topic 323 that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2016 and should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early adoption is permitted. The Company is currently evaluating the effect upon its financial statements.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) which clarify the implementation guidance on principal versus net considerations. The effective date and transition requirements for this standard are the same as the effective date and transition requirements of ASU 2014-09. The Company is currently evaluating the effect upon its financial statements.


F-12



TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016
(in thousands, except share data)

In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting which simplifies several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. In addition, the amendments in this Update eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the effect upon its financial statements.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing which clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. The Update includes targeted improvements based on input the Board received from the Transition Resource Group for Revenue Recognition and other stakeholders. The Update seeks to proactively address areas in which diversity in practice potentially could arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). The Company is currently evaluating the effect upon its financial statements.

In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting which  rescinds SEC paragraphs pursuant to the SEC Staff Announcement, “Rescission of Certain SEC Staff Observer Comments upon Adoption of Topic 606,” and the SEC Staff Announcement, “Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or Equity,” announced at the March 3, 2016 Emerging Issues Task Force (EITF) meeting.  The Company believes that that the adoption of this standard will not have an impact on the Company’s Consolidated Balance Sheets, results of operations or cash flows.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients which provides guidance on collectability, noncash consideration, and completed contracts at transition.  Additionally, the amendments in this Update provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers.  The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). The Company is currently evaluating the effect upon its financial statements.

In June 2016, the FASB issued ASU 2016-13 Financial Instruments -Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. This Update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The amendments will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The Company is currently evaluating the effect upon its financial statements.

(3) Acquisitions

Acquisitions during the six months ended June 30, 2016
Real Estate
Managed Properties

F-13



TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016
(in thousands, except share data)

During the six months ended June 30, 2016, Care and affiliates of Care’s partners entered into agreements to acquire and operate two senior housing communities for total consideration of $55,074 (which includes deposits of $125 paid in the fourth quarter of 2015) of which $39,217 was financed through mortgage debt issued in connection with the acquisitions, $3,885 was financed by contributions from the affiliates of Care’s partners, and the remainder was paid with cash on hand. Affiliates of Care’s partners provide management services to the communities under management contracts.

The primary reason for the Company’s acquisition of the senior housing communities is to expand its real estate operations. For the period from acquisition until June 30, 2016, revenue and the net loss in the aggregate for the two managed properties acquired were $3,973 and $1,421, respectively.

On June 30, 2016, the Company finalized the determination of the fair value of the assets acquired and the liabilities assumed. The adjustments to the provisional amounts recorded in the prior quarter was an increase of $540 to Real estate, net with an offsetting decrease of $540 to Intangible assets, net related to in-place leases. Additionally, the change to the provisional amounts resulted in a decrease in depreciation and amortization of $213, of which $80 relates to the previous quarter, recorded in the three months ended June 30, 2016.

The following table summarizes the consideration paid and the amounts of the final determination, as described above, of the fair value of the assets acquired and the liabilities assumed for the acquisitions completed during the six months ended June 30, 2016:

 
2016 Acquisitions
 
Real Estate
Consideration:
 
Cash
$
52,854

Noncontrolling interests contributions
2,220

Fair value of total consideration
$
55,074

 
 
Acquisition costs
$
383

 
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
Assets:
 
Real estate, net
$
51,825

Intangible assets, net
3,400

Other assets
117

 
 
Liabilities:
 
Deferred revenue
(261
)
Other liabilities and accrued expenses
(7
)
Total identifiable net assets assumed
$
55,074


The following table shows the values recorded by the Company, as of the acquisition date, for finite-lived intangible assets and their estimated amortization period:
Intangible Assets
Weighted Average Amortization Period (in Years)
 
Real Estate
In-place Lease
1.4
 
$
3,400


Supplemental pro forma results of operations have not been presented for the above 2016 business acquisitions as they are not material in relation to the Company’s reported results.


F-14



TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016
(in thousands, except share data)

Acquisitions during the six months ended June 30, 2015

Real Estate

Managed Properties

During the six months ended June 30, 2015, the Company and one of Care’s partners entered into agreements to acquire and operate five senior housing communities for total consideration of $29,251 (which includes deposits of $587 paid in the fourth quarter of 2014), of which $19,943 was financed through mortgage debt issued in connection with the acquisitions, $1,861 was financed by a contribution of cash from the partner, and the remainder was paid with cash on hand. Affiliates of the partner provide management services to the communities under a management contract.

Triple Net Lease Properties

During the six months ended June 30, 2015, the Company acquired the assets of six seniors housing communities for total consideration of $54,536 (which includes deposits of $1,490 paid in the fourth quarter of 2014), of which $39,500 was financed through mortgage debt issued in connection with the acquisitions, and the remainder was paid with cash on hand.

The primary reason for the Company’s acquisition of the senior housing communities was to expand its real estate operations. For the period from acquisition until June 30, 2015, revenue and the net loss in aggregate for the properties acquired were $4,954 and $2,138, respectively.

The following table summarizes the consideration paid and the final determination of amounts of fair value of the assets acquired and the liabilities assumed for the acquisitions completed during the six months ended June 30, 2015:

 
2015 Acquisitions
 
Real Estate
Fair value of total consideration
$
83,787

 
 
Acquisition costs
$
1,567

 
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
Assets:
 
Real estate, net
$
76,003

Intangible assets, net
8,800

Other assets
92

 
 
Liabilities:
 
Deferred revenue
(589
)
Other liabilities and accrued expenses
(519
)
Total identifiable net assets assumed
$
83,787


Supplemental pro forma results of operations have not been presented for the above 2015 business acquisitions as they were not material in relation to the Company’s reported results.

The following table shows the values recorded by the Company, as of the acquisition date, for finite-lived intangible assets and their estimated amortization period:
Intangible Assets
Weighted Average Amortization Period (in Years)
 
Real Estate
In-place Lease
8.7
 
$
8,800



F-15



TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016
(in thousands, except share data)

Insurance and Insurance Services - Purchase of Non-controlling Interests

On January 1, 2015, Fortegra Financial Corporation (Fortegra) exercised an option to purchase the remaining 37.6% ownership interest in ProtectCELL. Upon exercising the option, Fortegra made an initial payment of $3,000. Fortegra has accrued an additional $4,100.

(4) Dispositions, Assets Held for Sale and Discontinued Operations

The Company classified its Philadelphia Financial Group (PFG) subsidiary as held for sale as of December 31, 2014. At the time of such classification, the pending sale of PFG also met the requirements to be classified as a discontinued operation. The sale of PFG was completed on June 30, 2015.

As a result, the Company has reclassified the income and expenses attributable to PFG to income from discontinued operations, net for the three months and six months ended June 30, 2015.
 
 
 
 
The following table represents detail of revenues and expenses of discontinued operations in the Consolidated Statements of Operations for the three and six months ended June 30, 2015:
 
Three Months Ended June 30, 2015
 
Six Months Ended June 30, 2015
Revenues:
 
 
 
Net realized gain
$
131

 
$
151

Interest income
1,041

 
2,215

Separate account fees
6,480

 
12,706

Service and administrative fees
12,726

 
25,385

Other income

 
2

Total revenues
20,378

 
40,459

Expenses:
 
 
 
Interest expense
2,572

 
5,226

Payroll expense
4,474

 
9,086

Professional fees
451

 
770

Change in future policy benefits
975

 
2,077

Mortality expenses
2,883

 
5,688

Commission expense
915

 
1,723

Depreciation and amortization
405

 
862

Other expenses
1,995

 
4,232

Total expenses
14,670

 
29,664

Less: provision for income taxes
1,054

 
3,796

Income from discontinued operations, net
$
4,654

 
$
6,999

The following table presents the cash flows from discontinued operations for the periods indicated:
 
 
 
Six Months Ended June 30,
 
2015
Net cash provided by (used in):
 
Operating activities
$
(6,198
)
Investing activities
11,866

Financing activities
(5,000
)
Net cash flows provided by discontinued operations
$
668


(5) Operating Segment Data

The Company has five reportable operating segments, which are: (i) insurance and insurance services, (ii) specialty finance, (iii) real estate, (iv) asset management and (v) corporate and other. The Company’s operating segments are organized in a manner that reflects how management views these strategic business units.


F-16



TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016
(in thousands, except share data)

Each reportable segment’s income (loss) is reported before income taxes, discontinued operations and non-controlling interests.

Descriptions of each of the reportable segments are as follows:

Insurance and Insurance Services operations are conducted through Fortegra, a specialized insurance company that offers a wide array of consumer related protection products, including credit-related insurance, mobile device protection, and warranty and service contracts. Fortegra also provides third party administration services to insurance companies, retailers, automobile dealers, insurance brokers and agents and financial services companies.
Specialty Finance is comprised of Siena Capital Finance LLC (Siena), which commenced operations in April 2013, and the Company’s mortgage businesses which consists of Luxury, which was acquired in January 2014 and Reliance which was acquired in July 2015. The Company’s mortgage origination business originated loans for sale to institutional investors, including GSEs, FHA/VA, prime jumbo and super jumbo mortgages, through both retail and wholesale channels and through a call center model, primarily focused on re-financings. Segment results incorporate the revenues and expenses of these subsidiaries since they commenced operations or were acquired. Siena’s business consists of structuring asset-based loan facilities across diversified industries which include manufacturing, distribution, wholesale, and service companies.
Real Estate operations include Care LLC (Care), a wholly-owned subsidiary of Tiptree which has a geographically diverse portfolio of seniors housing properties including senior apartments, assisted living, independent living, memory care and skilled nursing facilities in the U.S.
Asset Management operations is primarily comprised of Telos Asset Management’s (Telos) management of CLOs. Telos is a subsidiary of Tiptree Asset Management Company, LLC (TAMCO), an SEC-registered investment advisor owned by the Company.
Corporate and other operations include the Company’s principal investments and corporate expenses.

The tables below present the components of revenue, expense, pre-tax income (loss), and segment assets for each of the operating segments for the following periods:
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2016
 
Insurance and insurance services
 
Specialty finance
 
Real estate
 
Asset management
 
Corporate and other
 
Total
Total revenue
$
87,790

 
$
22,211

 
$
14,619

 
$
1,661

 
$
7,471

 
$
133,752

Total expense
79,712

 
19,899

 
15,774

 
1,329

 
10,904

 
127,618

Net income attributable to consolidated CLOs

 

 

 
746

 
4,166

 
4,912

Pre-tax income (loss)
$
8,078

 
$
2,312

 
$
(1,155
)
 
$
1,078

 
$
733

 
$
11,046

Less: Provision (benefit) for income taxes
 
 
 
 
 
 
 
 
 
 
4,025

Discontinued operations
 
 
 
 
 
 
 
 
 
 

Net income before non-controlling interests
 
 
 
 
 
 
 
 
 
 
$
7,021

Less: net income attributable to non-controlling interests from continuing operations and discontinued operations
 
 
 
 
 
 
 
 
 
 
888

Net income available to common stockholders
 
 
 
 
 
 
 
 
 
 
$
6,133

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2015
 
Insurance and insurance services
 
Specialty finance
 
Real estate
 
Asset management
 
Corporate and other
 
Total
Total revenue
$
78,521

 
$
7,980

 
$
12,350

 
$
1,786

 
$
391

 
$
101,028

Total expense
72,221

 
7,412

 
14,319

 
2,578

 
6,145

 
102,675

Net income attributable to consolidated CLOs

 

 

 
1,004

 
(937
)
 
67

Pre-tax income (loss)
$
6,300

 
$
568

 
$
(1,969
)
 
$
212

 
$
(6,691
)
 
$
(1,580
)
Less: Provision (benefit) for income taxes
 
 
 
 
 
 
 
 
 
 
(371
)
Discontinued operations
 
 
 
 
 
 
 
 
 
 
21,003

Net income before non-controlling interests
 
 
 
 
 
 
 
 
 
 
$
19,794

Less: net income attributable to non-controlling interests from continuing operations and discontinued operations
 
 
 
 
 
 
 
 
 
 
4,832


F-17



TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016
(in thousands, except share data)

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2015
Net income available to common stockholders
 
 
 
 
 
 
 
 
 
 
$
14,962

 
Six Months Ended June 30, 2016
 
Insurance and insurance services
 
Specialty finance
 
Real estate
 
Asset management
 
Corporate and other
 
Total
Total revenue
$
177,102

 
$
38,777

 
$
28,509

 
$
3,667

 
$
17,503

 
$
265,558

Total expense
160,027

 
37,448

 
33,523

 
2,675

 
21,881

 
255,554

Net income attributable to consolidated CLOs

 

 

 
1,746

 
4,271

 
6,017

Pre-tax income (loss)
$
17,075

 
$
1,329

 
$
(5,014
)
 
$
2,738

 
$
(107
)
 
$
16,021

Less: provision for income taxes
 
 
 
 
 
 
 
 
 
 
1,586

Discontinued operations, net
 
 
 
 
 
 
 
 
 
 

Net income before non-controlling interests
 
 
 
 
 
 
 
 
 
 
$
14,435

Less: net income attributable to non-controlling interests from continuing operations and discontinued operations
 
 
 
 
 
 
 
 
 
 
2,747

Net income available to common stockholders
 
 
 
 
 
 
 
 
 
 
$
11,688

 
Six Months Ended June 30, 2015
 
Insurance and insurance services
 
Specialty finance
 
Real estate
 
Asset management
 
Corporate and other
 
Total
Total revenue
$
150,900

 
$
14,235

 
$
21,774

 
$
2,833

 
$
349

 
$
190,091

Total expense
140,574

 
13,232

 
27,924

 
3,588

(1 
) 
11,969

(1 
) 
197,287

Net income (loss) attributable to consolidated CLOs

 

 

 
2,841

 
(3,085
)
 
(244
)
Pre-tax income (loss)
$
10,326

 
$
1,003

 
$
(6,150
)
 
$
2,086

 
$
(14,705
)
 
$
(7,440
)
Less: (benefit) for income taxes
 
 
 
 
 
 
 
 
 
 
(1,867
)
Discontinued operations
 
 
 
 
 
 
 
 
 
 
23,348

Net income before non-controlling interests
 
 
 
 
 
 
 
 
 
 
$
17,775

Less: net income attributable to non-controlling interests from continuing operations and discontinued operations
 
 
 
 
 
 
 
 
 
 
3,792

Net income available to common stockholders
 
 
 
 
 
 
 
 
 
 
$
13,983

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The following table presents the segment assets for the following periods:
 
Insurance and insurance services
 
Specialty finance
 
Real estate
 
Asset management
 
Corporate and other
 
Total
Segment Assets as of June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Segment assets
$
976,534

 
$
233,774

 
$
278,670

 
$
1,735

 
$
223,925

 
$
1,714,638

Assets of consolidated CLOs
 
 
 
 
 
 
 
 
 
 
989,615

Total assets
 
 
 
 
 
 
 
 
 
 
$
2,704,253

 
 
 
 
 
 
 
 
 
 
 
 
Segment Assets as of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Segment assets
$
929,054

 
$
208,201

 
$
230,546

 
$
1,820

 
$
396,537

 
$
1,766,158

Assets of consolidated CLOs
 
 
 
 
 
 
 
 
 
 
728,812

Total assets
 
 
 
 
 
 
 
 
 
 
$
2,494,970


(1)
Bonus of $2,439 was reclassified from Corporate and other to Asset management to conform to the current period presentation.


F-18



TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016
(in thousands, except share data)

(6) Securities, Available for Sale

All of the Company’s investments in available for sale securities as of June 30, 2016 and December 31, 2015 are held by Fortegra. The following tables present the Company's investments in available for sale securities:
 
As of June 30, 2016
 
Amortized Cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
38,394

 
$
1,072

 
$
(6
)
 
$
39,460

Obligations of state and political subdivisions
51,513

 
1,347

 
(6
)
 
52,854

Corporate securities
61,369

 
1,109

 
(17
)
 
62,461

Asset backed securities
1,490

 
59

 

 
1,549

Certificates of deposit
893

 

 

 
893

Equity securities
6,081

 
270

 
(19
)
 
6,332

Obligations of foreign governments
1,432

 
44

 

 
1,476

Total
$
161,172

 
$
3,901

 
$
(48
)
 
$
165,025

 
 
 
 
 
 
 
 
 
As of December 31, 2015
 
Amortized Cost
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
53,274

 
$
83

 
$
(221
)
 
$
53,136

Obligations of state and political subdivisions
51,942

 
466

 
(73
)
 
52,335

Corporate securities
68,400

 
89

 
(651
)
 
67,838

Asset backed securities
1,525

 
4

 

 
1,529

Certificates of deposit
893

 

 

 
893

Equity securities
6,081

 
106

 
(79
)
 
6,108

Obligations of foreign governments
2,931

 

 
(67
)
 
2,864

Total
$
185,046

 
$
748

 
$
(1,091
)
 
$
184,703



F-19



TIPTREE FINANCIAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2016
(in thousands, except share data)

The following tables summarize the gross unrealized losses on available for sale securities in an unrealized loss position:
 
As of June 30, 2016
 
Less Than or Equal to One Year
 
More Than One Year
 
Fair value
 
Gross
unrealized losses
 
# of Securities
 
Fair value
 
Gross unrealized losses
 
# of Securities
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
2,216

 
$
(5
)
 
38

 
$
74

 
$
(1
)
 
8

Obligations of state and political subdivisions
4,848

 
(6
)
 
10

 

 

 

Corporate securities
2,696

 
(8
)
 
23

 
652

 
(9
)
 
10

Equity securities

 

 

 
991

 
(19
)
 
5

Total
$
9,760

 
$
(19
)
 
71

 
$
1,717

 
$
(29
)
 
23

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015
 
Less Than or Equal to One Year
 
More Than One Year
 
Fair value
 
Gross
unrealized losses
 
# of Securities
 
Fair value
 
Gross unrealized losses
 
# of Securities
U.S. Treasury securities and obligations of U.S. government authorities and agencies
$
35,588

 
$
(221
)
 
146

 
$

 
$

 

Obligations of state and political subdivisions
18,500

 
(59
)
 
45