0001628280-18-014269.txt : 20181113 0001628280-18-014269.hdr.sgml : 20181113 20181113162331 ACCESSION NUMBER: 0001628280-18-014269 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 105 CONFORMED PERIOD OF REPORT: 20170930 FILED AS OF DATE: 20181113 DATE AS OF CHANGE: 20181113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Hunt Companies Finance Trust, Inc. CENTRAL INDEX KEY: 0001547546 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 454966519 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-35845 FILM NUMBER: 181178299 BUSINESS ADDRESS: STREET 1: 641 LEXINGTON AVENUE STREET 2: SUITE 1432 CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: (212) 328-9521 MAIL ADDRESS: STREET 1: 641 LEXINGTON AVENUE STREET 2: SUITE 1432 CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: Five Oaks Investment Corp. DATE OF NAME CHANGE: 20120417 10-Q/A 1 oaks10-qa201709301.htm 10-Q Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
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 No. 001-35845 
HUNT COMPANIES FINANCE TRUST, iNC.
(Exact name of registrant as specified in its charter) 
Maryland
45-4966519
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)
230 Park Avenue, 19th Floor, New York, New York 10169
(Address of principal executive office) (Zip Code)
(212) 521-6323
(Registrant’s telephone number, including area code)
N/A
(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 ý 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 ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company to an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” "smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.  
Large accelerated filer ¨
Accelerated filer x
 
 
Non-accelerated filer ¨
Smaller reporting company ¨
(Do not check if a smaller reporting company)
Emerging growth company x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at November 8, 2017
Common stock, $0.01 par value
 
22,139,258





EXPLANATORY NOTE

As used in the in this Amendment No. 1 on Form 10-Q/A for the quarter ended September 30, 2017 (the “Form 10-Q/A”), the terms “Company”, “our” or “we” refer to Hunt Companies Finance Trust, Inc. (known as Five Oaks Investment Corp. at the time of the filing of the Original Filing, as defined below), a Maryland Corporation.

This Form 10-Q/A amends the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, as originally filed with the Securities and Exchange Commission (“SEC”) on November 8, 2017 (the “Original Filing”). This Form 10-Q/A is being filed to restate our unaudited condensed consolidated financial statements for the quarter ended September 30, 2017 and to make related revisions to certain other disclosures in the Original Filing as a result of the concurrent filing of our Amendment No. 1 on Form 10-Q/A for the quarter ended September 30, 2016 and Amendment No. 2 on Form 10-K/A for the fiscal year ended December 31, 2016. Further explanation regarding the restatement is set forth in Note 20 to the unaudited condensed consolidated financial statements included in this Form 10-Q/A.

The following sections in the Original Filing are revised in this Form 10-Q/A to reflect the restatement of:
Part I - Item 1 - Financial Statements (Unaudited)
Part I - Item 2 - Management’s Discussion and Analysis of Financial condition and Results of Operations
Part I - Item 4 - Controls and Procedures
Part II - Item 6 - Exhibits

Our principal executive officer and principal financial officer have also provided new certifications as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications are included in this Form 10-Q/A as Exhibits 31.1, 31.2, 32.1 and 32.2.

For the convenience of the reader, this Form 10-Q/A sets forth the information in the Original Filing in its entirety, as such information is modified and superseded where necessary to reflect the restatement and other revisions. Except as provided above, this Amendment No. 1 does not reflect events occurring after the filing of the Original Filing and does not amend or otherwise update any information in the Original Filing. Accordingly, this Form 10-Q/A should be read in conjunction with our filings with the SEC subsequent to the date on which we filed the Original Filing with the SEC.

FIVE OAKS INVESTMENT CORP.
 
INDEX
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 







PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 

FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
 
 
9/30/2017 (1)
 
12/31/2016 (1)  
 
 
(unaudited)
 
 
ASSETS
 
 

 
 

Available-for-sale securities, at fair value (includes pledged securities of $1,309,061,643 and $876,121,505 for September 30, 2017 and December 31, 2016, respectively)
 
$
1,304,486,040

 
$
870,929,601

Mortgage loans held-for-sale, at fair value
 
495,486

 
2,849,536

Multi-family loans held in securitization trusts, at fair value
 
1,149,888,917

 
1,222,905,433

Residential loans held in securitization trusts, at fair value
 
125,403,499

 
141,126,720

Mortgage servicing rights, at fair value
 
2,993,997

 
3,440,809

Cash and cash equivalents
 
30,554,867

 
27,534,374

Restricted cash
 
15,437,341

 
10,355,222

Deferred offering costs
 
78,432

 
96,489

Accrued interest receivable
 
8,732,428

 
7,619,717

Investment related receivable
 
4,699,021

 
3,914,458

Derivative assets, at fair value
 

 
8,053,813

Other assets
 
912,719

 
775,031

 
 
 
 
 
Total assets
 
$
2,643,682,747

 
$
2,299,601,203

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 

 
 

LIABILITIES:
 
 

 
 

Repurchase agreements:
 
 

 
 

Available-for-sale securities
 
$
1,237,661,000

 
$
804,811,000

Multi-family securitized debt obligations
 
1,128,773,402

 
1,204,583,678

Residential securitized debt obligations
 
119,882,464

 
134,846,348

Accrued interest payable
 
5,205,165

 
5,467,916

Derivative liabilities, at fair value
 
529,075

 

Dividends payable
 
29,349

 
39,132

Deferred income
 
202,896

 
203,743

Due to broker
 

 
4,244,678

Fees and expenses payable to Manager
 
587,000

 
880,000

Other accounts payable and accrued expenses
 
273,732

 
2,057,843

 
 
 
 
 
Total liabilities
 
2,493,144,083

 
2,157,134,338

 
 
 
 
 
COMMITMENTS AND CONTINGENCIES (NOTE 15)
 


 


 
 
 
 
 
STOCKHOLDERS' EQUITY:
 
 

 
 

Preferred Stock: par value $0.01 per share; 50,000,000 shares authorized, 8.75% Series A cumulative redeemable, $25 liquidation preference, 1,610,000 and 1,610,000 issued and outstanding at September 30, 2017 and December 31, 2016, respectively
 
37,156,972

 
37,156,972

Common Stock: par value $0.01 per share; 450,000,000 shares authorized, 22,139,258 and 17,539,258 shares issued and outstanding, at September 30, 2017 and December 31, 2016, respectively
 
221,393

 
175,348

Additional paid-in capital
 
224,063,268

 
204,264,868

Accumulated other comprehensive income (loss)
 
(3,206,409
)
 
(6,831,940
)
Cumulative distributions to stockholders
 
(100,438,604
)
 
(89,224,194
)
Accumulated earnings (deficit)
 
(7,257,956
)
 
(3,074,189
)
 
 
 
 
 
Total stockholders' equity
 
150,538,664

 
142,466,865

 
 
 
 
 
Total liabilities and stockholders' equity
 
$
2,643,682,747

 
$
2,299,601,203


(1) Our consolidated balance sheets include assets and liabilities of consolidated variable interest entities ("VIEs") as the Company is the primary beneficiary of these VIEs. As of September 30, 2017 and December 31, 2016, assets of consolidated VIEs totaled $1,280,093,874 and $1,369,120,941 respectively, and the liabilities of consolidated VIEs totaled $1,253,353,428 and $1,344,404,080 respectively
See Notes 6 and 7 for further discussion
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3





FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
 
 
Three Months Ended September 30, 2017
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2017
 
Nine Months Ended September 30, 2016
 
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Revenues:
 
 

 
 

 
 

 
 

Interest income:
 
 

 
 

 
 

 
 

Available-for-sale securities
 
$
7,827,281

 
$
6,549,869

 
$
21,308,582

 
$
16,780,701

Mortgage loans held-for-sale
 
12,082

 
121,892

 
69,416

 
411,199

Multi-family loans held in securitization trusts
 
13,473,913

 
14,466,946

 
40,992,241

 
44,597,652

Residential loans held in securitization trusts
 
1,249,966

 
1,582,090

 
3,903,924

 
9,143,343

Cash and cash equivalents
 
63,264

 
11,754

 
138,745

 
26,409

Interest expense:
 
 

 
 

 
 
 
 
Repurchase agreements - available-for-sale securities
 
(4,118,639
)
 
(1,572,062
)
 
(9,087,956
)
 
(4,400,290
)
Repurchase agreements - mortgage loans held-for-sale
 

 
(57,449
)
 

 
(227,733
)
Multi-family securitized debt obligations
 
(12,766,808
)
 
(13,740,005
)
 
(38,866,888
)
 
(41,667,457
)
Residential securitized debt obligations
 
(995,293
)
 
(1,210,186
)
 
(3,100,616
)
 
(6,978,474
)
 
 
 
 
 
 
 
 
 
Net interest income
 
4,745,766

 
6,152,849

 
15,357,448

 
17,685,350

Other-than-temporary impairments
 
 

 
 

 
 

 
 

(Increase) decrease in credit reserves
 

 
(19,790
)
 

 
(187,008
)
Additional other-than-temporary credit impairment losses
 

 
(183,790
)
 

 
(183,790
)
 
 
 
 
 
 
 
 
 
Total impairment losses recognized in earnings
 

 
(203,580
)
 

 
(370,798
)
Other income:
 
 

 
 

 
 

 
 

Realized gain (loss) on sale of investments, net
 
(5,148,445
)
 
(749,604
)
 
(14,616,997
)
 
(3,361,609
)
Change in unrealized gain (loss) on fair value option securities
 

 
(958,995
)
 
9,448,270

 
(7,293,268
)
Realized gain (loss) on derivative contracts, net
 
(1,636,725
)
 
(820,974
)
 
2,049,400

 
(3,167,877
)
Change in unrealized gain (loss) on derivative contracts, net
 
307,263

 
3,340,600

 
(8,583,100
)
 
(7,172,338
)
Realized gain (loss) on mortgage loans held-for-sale
 
(221,197
)
 
60,427

 
(221,620
)
 
129,175

Change in unrealized gain (loss) on mortgage loans held-for-sale
 
28,794

 
(138,785
)
 
17,727

 
(2,885
)
Change in unrealized gain (loss) on mortgage servicing rights
 
(102,945
)
 
(204,505
)
 
(457,720
)
 
(1,243,240
)
Change in unrealized gain (loss) on multi-family loans held in securitization trusts
 
694,730

 
930,312

 
2,797,566

 
(5,604,839
)
Change in unrealized gain (loss) on residential loans held in securitization trusts
 
(155,252
)
 
(764,599
)
 
(773,674
)
 
80,511

Other interest expense
 

 
(1,860,000
)
 
(152,322
)
 
(1,860,000
)
Servicing income
 
276,211

 
258,458

 
721,468

 
726,011

Other income
 
8,369

 
3

 
33,275

 
26,811

 
 
 
 
 
 
 
 
 
Total other income (loss)
 
(5,949,197
)
 
(907,662
)
 
(9,737,727
)
 
(28,743,548
)
Expenses:
 
 

 
 

 
 

 
 

Management fee
 
573,412

 
623,525

 
1,670,804

 
1,873,486

General and administrative expenses
 
1,288,978

 
1,171,421

 
4,120,807

 
4,483,064

Operating expenses reimbursable to Manager
 
915,452

 
1,184,391

 
3,086,304

 
3,573,445

Other operating expenses
 
225,502

 
161,036

 
770,189

 
1,393,303

Compensation expense
 
49,562

 
50,544

 
155,384

 
144,431

 
 
 
 
 
 
 
 
 
Total expenses
 
3,052,906

 
3,190,917

 
9,803,488

 
11,467,729

 
 
 
 
 
 
 
 
 
Net income (loss)
 
(4,256,337
)
 
1,850,690

 
(4,183,767
)
 
(22,896,725
)
 
 
 
 
 
 
 
 
 
Dividends to preferred stockholders
 
(880,509
)
 
(880,509
)
 
(2,631,744
)
 
(2,631,744
)
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders
 
$
(5,136,846
)
 
$
970,181

 
$
(6,815,511
)
 
$
(25,528,469
)
 
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 

 
 

 
 

 
 

Net income (loss) attributable to common stockholders (basic and diluted)
 
$
(5,136,846
)
 
$
970,181

 
$
(6,815,511
)
 
$
(25,528,469
)
Weighted average number of shares of common stock outstanding
 
22,139,258

 
14,600,193

 
19,342,188

 
14,601,306

Basic and diluted income (loss) per share
 
$
(0.23
)
 
$
0.07

 
$
(0.35
)
 
$
(1.75
)
Dividends declared per share of common stock
 
$
0.15

 
$
0.18

 
$
0.45

 
$
0.54

 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4





FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
 
Three Months Ended September 30, 2017
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2017
 
Nine Months Ended September 30, 2016
 
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Net income (loss)
 
$
(4,256,337
)
 
$
1,850,690

 
$
(4,183,767
)
 
$
(22,896,725
)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 

 
 

 
 

 
 

Increase (decrease) in net unrealized gain (loss) on available-for-sale securities, net
 
(4,175,111
)
 
(979,421
)
 
(2,954,193
)
 
12,119,724

Reclassification adjustment for net gain (loss) included in net income (loss)
 
6,362,159

 
23,914

 
6,579,724

 
(6,523,410
)
Reclassification adjustment for other-than-temporary impairments included in net income (loss)
 

 
19,790

 

 
187,008

 
 
 
 
 
 
 
 
 
Total other comprehensive income (loss)
 
2,187,048

 
(935,717
)
 
3,625,531

 
5,783,322

 
 
 
 
 
 
 
 
 
Less: Dividends to preferred stockholders
 
(880,509
)
 
(880,509
)
 
(2,631,744
)
 
(2,631,744
)
 
 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to common stockholders
 
$
(2,949,798
)
 
$
34,464

 
$
(3,189,980
)
 
$
(19,745,147
)
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


5





FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity
(unaudited)
 
 
Preferred Stock
 
Common Stock
 
Additional
Paid in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Cumulative
Distributions to
Stockholders
 
Accumulated
Earnings
(Deficit)
 
Total
Stockholders'
Equity
 
 
Shares
 
Par Value
 
Shares
 
Par Value
 
 
 
 
 
Balance at January 1, 2017
 
1,610,000

 
$
37,156,972

 
17,539,258

 
$
175,348

 
$
204,264,868

 
$
(6,831,940
)
 
$
(89,224,194
)
 
$
(3,074,189
)
 
$
142,466,865

Issuance of common stock, net
 

 

 
4,604,500

 
46,045

 
21,113,955

 

 

 

 
21,160,000

Cost of issuing common stock
 

 

 

 

 
(1,332,189
)
 

 

 

 
(1,332,189
)
Issuance of preferred stock, net
 

 

 

 

 

 

 

 

 

Redemption of preferred stock, net
 

 

 

 

 

 

 

 

 

Purchase of treasury stock, net
 

 

 

 

 

 

 

 

 

Restricted stock compensation expense
 

 

 
(4,500
)
 

 
16,634

 

 

 

 
16,634

Net income (loss)
 

 

 

 

 

 

 

 
(4,183,767
)
 
(4,183,767
)
Increase (decrease) in net unrealized gain (loss) on available-for-sale securities, net
 

 

 

 

 

 
(2,954,193
)
 

 

 
(2,954,193
)
Reclassification adjustment for net gain (loss) included in net income (loss)
 

 

 

 

 

 
6,579,724

 

 

 
6,579,724

Reclassification adjustment for other-than-temporary impairments included in net income (loss)
 

 

 

 

 

 

 

 

 

Common dividends declared
 

 

 

 

 

 

 
(8,582,666
)
 

 
(8,582,666
)
Preferred dividends declared
 

 

 

 

 

 

 
(2,631,744
)
 

 
(2,631,744
)
Balance at September 30, 2017
 
1,610,000

 
$
37,156,972

 
22,139,258

 
$
221,393

 
$
224,063,268

 
$
(3,206,409
)
 
$
(100,438,604
)
 
$
(7,257,956
)
 
$
150,538,664

 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


6





FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
 
 
Nine Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2016
 
 
(unaudited)
 
(unaudited)
Cash flows from operating activities:
 
 

 
 

Net income (loss)
 
$
(4,183,767
)
 
$
(22,896,725
)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
 
 

 
 

Other-than-temporary impairment charges
 

 
370,798

Amortization/accretion of available-for-sale securities premiums and discounts, net
 
(1,653,155
)
 
(5,257,442
)
Realized (gain) loss on sale of investments, net
 
14,616,997

 
3,361,609

Realized (gain) loss on derivative contracts, net
 
(2,049,400
)
 
3,167,877

Realized (gain) loss on mortgage loans held-for-sale
 
221,620

 
(129,175
)
Unrealized (gain) loss on fair value option securities
 
(9,448,270
)
 
7,293,268

Unrealized (gain) loss on derivative contracts
 
8,583,100

 
7,172,338

Unrealized (gain) loss on mortgage loans held-for-sale
 
(17,727
)
 
2,885

Unrealized (gain) loss on mortgage servicing rights
 
457,720

 
1,243,240

Unrealized (gain) loss on multi-family loans held in securitization trusts
 
(2,797,566
)
 
5,604,839

Unrealized (gain) loss on residential loans held in securitization trusts
 
773,674

 
(80,511
)
Restricted stock compensation expense
 
16,634

 
29,014

Net change in:
 
 

 
 

Accrued interest receivable
 
(1,400,041
)
 
(672,852
)
Deferred offering costs
 
18,057

 

Other assets
 
(137,688
)
 
(398,140
)
Accrued interest payable
 
13,743

 
(43,909
)
Deferred income
 
(847
)
 
6,905

Fees and expenses payable to Manager
 
(293,000
)
 
(151,716
)
Other accounts payable and accrued expenses
 
(1,784,111
)
 
1,795,403

 
 
 
 
 
Net cash (used in) provided by operating activities
 
935,973

 
417,706

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Purchase of available-for-sale securities
 
(1,000,558,281
)
 
(454,443,440
)
Purchase of mortgage loans held-for-sale
 

 
(14,772,535
)
Purchase of mortgage servicing rights
 
(10,910
)
 

Proceeds from sales of available-for-sale securities
 
469,004,262

 
230,557,084

Proceeds from mortgage loans held-for-sale
 
2,098,010

 
16,289,603

Proceeds from FHLBI stock
 

 
2,391,700

Net proceeds from (payments for) derivative contracts
 
2,049,188

 
(3,167,877
)
Principal payments from available-for-sale securities
 
98,107,847

 
66,007,840

Principal payments from mortgage loans held-for-sale
 
52,146

 
235,622

Investment related receivable
 
(784,563
)
 
(2,539,730
)
Due from broker
 
(4,244,678
)
 

 
 
 
 
 
Net cash (used in) provided by investing activities
 
(434,286,979
)
 
(159,441,733
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Proceeds from (costs for) issuance of common stock
 
19,827,811

 

Purchase of treasury stock
 

 
(283,565
)
Dividends paid on common stock
 
(8,582,666
)
 
(7,885,803
)
Dividends paid on preferred stock
 
(2,641,527
)
 
(2,641,527
)
Proceeds from repurchase agreements - available-for-sale securities
 
10,247,863,000

 
5,603,428,000

Proceeds from repurchase agreements - mortgage loans held-for-sale
 

 
16,405,081

Principal repayments of FHLBI advances
 

 
(49,697,000
)
Principal repayments of repurchase agreements - available-for-sale securities
 
(9,815,013,000
)
 
(5,373,159,000
)
Principal repayments of repurchase agreements - mortgage loans held-for-sale
 

 
(18,783,717
)
 
 
 
 
 

Net cash (used in) provided by financing activities
 
441,453,618

 
167,382,469

 
 
 
 
 
Net increase (decrease) in cash, cash equivalents and restricted cash
 
8,102,612

 
8,358,442

 
 
 
 
 
Cash, cash equivalents and restricted cash, beginning of period
 
37,889,596

 
34,315,356

 
 
 
 
 
Cash, cash equivalents and restricted cash, end of period
 
$
45,992,208

 
$
42,673,798

 
 
 
 
 
Supplemental disclosure of cash flow information
 
 

 
 

Cash paid for interest
 
$
11,086,534

 
$
4,671,932

 
 
 
 
 
Non-cash investing and financing activities information
 
 

 
 

Dividends declared but not paid at end of period
 
$
29,349

 
$
29,349

Net change in unrealized gain (loss) on available-for-sale securities
 
$
3,625,531

 
$
5,783,321

Consolidation of multi-family loans held in securitization trusts
 
$
1,154,277,919

 
$
1,271,754,540

Consolidation of residential loans held in securitization trusts
 
$
125,815,955

 
$
153,858,101

Consolidation of multi-family securitized debt obligations
 
$
1,133,138,620

 
$
1,253,797,808

Consolidation of residential securitized debt obligations
 
$
120,214,808

 
$
147,807,489

 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7


FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (unaudited)




NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS

Five Oaks Investment Corp. (the “Company”) is a Maryland corporation focused primarily on investing in, financing and managing residential mortgage-backed securities (“RMBS”), multi-family mortgage backed securities (“Multi-Family MBS”, and together with RMBS, “MBS”), mortgage servicing rights and other mortgage-related investments. The Company is externally managed by Oak Circle Capital Partners, LLC (the “Manager”), an asset management firm incorporated in Delaware. The Company’s common stock is listed on the NYSE under the symbol “OAKS.”

The Company was incorporated on March 28, 2012 and commenced operations on May 16, 2012. The Company began trading as a publicly traded company on March 22, 2013.

The Company has elected to be taxed as a real estate investment trust (“REIT”) and to comply with Sections 856 through 859 of the Internal Revenue Code of 1986, as amended, the ("Code"). Accordingly, the Company generally will not be subject to U.S. federal income tax to the extent of its distributions to stockholders and as long as certain asset, income and share ownership tests are met. The Company invests in Agency RMBS, which are RMBS for which the principal and interest payments are guaranteed by a U.S. Government agency such as the Government National Mortgage Association or a U.S. Government-sponsored entity such as the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation. The Company also invests in Non-Agency RMBS, which are RMBS that are not guaranteed by a U.S. Government agency or a U.S. Government-sponsored entity. Additionally, the Company invests in Multi-Family MBS, which are MBS for which the principal and interest may be sponsored by a U.S. Government agency such as the Government National Mortgage Association or a U.S. Government-sponsored entity such as the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, or may not be sponsored by a U.S. Government agency or a U.S. Government-sponsored entity. The Company also invests in residential mortgage loans, mortgage servicing rights, and may also invest in other mortgage-related investments.

On June 10, 2013, the Company established Five Oaks Acquisition Corp. (“FOAC”) as a wholly owned taxable REIT subsidiary (“TRS”), for the acquisition and disposition of residential mortgage loans. The Company consolidates this subsidiary under generally accepted accounting principles in the United States of America (“GAAP”).

On April 30, 2014, the Company established Five Oaks Insurance LLC (“FOI”) as a wholly owned subsidiary. FOI was dissolved on July 18, 2016. The Company previously consolidated this subsidiary under GAAP.

In September 2014, and October 2014, respectively, the Company acquired first loss tranches issued or backed by two Freddie Mac-sponsored Multi-Family MBS K series securitizations (the “FREMF 2011-K13 Trust” and the “FREMF 2012-KF01 Trust”). The Company determined that each of the trusts was a variable interest entity (“VIE”) and that in each case the Company remains the primary beneficiary, and accordingly consolidated the assets and liabilities of the trusts into the Company’s financial statements in accordance with GAAP. On April 21, 2016, and April 26, 2016, respectively, the Company completed two re-securitization transactions (the “Re-REMIC transactions”). The Company consolidates the assets and liabilities of the newly established trusts, in each case based upon the Company’s purchase of first-loss securities of the Re-REMIC transactions. Accordingly, the Company has determined that it remains the primary beneficiary of the underlying trusts and continues to consolidate the assets and liabilities of each underlying trust.

In October 2014, and December 2014, respectively, the Company also acquired first loss and subordinated tranches issued by two residential mortgage-backed securitizations (the “JPMMT 2014-OAK4 Trust” and the “CSMC 2014-OAK1 Trust”). During the second quarter of 2016, the Company sold the first loss and subordinated tranches issued by the JPMMT 2014-OAK4 Trust, and as a result, having determined that it is no longer the primary beneficiary of the trust, the Company no longer consolidates the assets and liabilities of that trust. The Company determined that CSMC 2014-OAK1 Trust was a VIE and that the Company continues to be the primary beneficiary, and accordingly consolidates the assets and liabilities of the trust into the Company’s financial statements in accordance with GAAP.

On March 23, 2015, the Company established Oaks Funding LLC as a wholly owned subsidiary of FOAC, to fulfill certain functions as depositor in respect of residential mortgage loan securitization transactions. The Company consolidates this subsidiary under GAAP.

On April 20, 2016, the Company established Oaks Funding II LLC as a wholly owned subsidiary of FOAC, to fulfill certain functions as depositor in respect of certain Re-REMIC transactions. The Company consolidates this subsidiary under GAAP.

On April 20, 2016, the Company established Oaks Holding I LLC as a wholly owned subsidiary to hold certain investment securities. The Company consolidates this subsidiary under GAAP.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated balance sheet as of December 31, 2016 has been derived from audited financial statements. The condensed consolidated balance sheet as of September 30, 2017, the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive income (loss), for the three and nine months ended September 30, 2017 and for the three and nine months ended September 30, 2016, the condensed consolidated statement of stockholders’ equity for the nine months ended September 30, 2017 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2017, and the nine months ended September 30, 2016, are unaudited.

The unaudited condensed consolidated financial statements and related notes have been prepared in accordance with GAAP for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures normally included in the financial statements prepared under GAAP have been condensed or omitted. In the opinion of management, all adjustments are considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These condensed consolidated financial statements should be read in conjunction with the Company’s financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2016, which was filed with the Securities and Exchange Commission (“SEC”) on November 13, 2018.



8




FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Reclassifications

Certain prior year amounts have been reclassified to conform to current year presentation.

Principles of Consolidation

The accompanying condensed consolidated financial statements of the Company include the accounts of the Company and all its subsidiaries which are majority-owned, controlled by the Company or a variable interest entity where the Company is the primary beneficiary. All significant intercompany transactions have been eliminated on consolidation.

VIEs

An entity is referred to as a VIE if it lacks one or more of the following characteristics: (1) sufficient equity at risk to finance its activities without additional subordinated financial support provided by any parties, including the equity holders; (2) as a group the holders of the equity investment at risk have (a) the power, through voting rights or similar rights, to direct the activities of a legal entity that most significantly impacts the entity's economic performance, (b) the obligation to absorb the expected losses of the legal entity and (c) the right to receive the expected residual returns of the legal entity; and (3) the voting rights of these investors are proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected returns of their equity, or both, and whether substantially all of the entity's activities involve or are conducted on behalf of an investor that has disproportionately fewer voting rights. An investment that lacks one or more of the above three characteristics is considered to be a VIE. The Company reassesses its initial evaluation of an entity as a VIE based upon changes in the facts and circumstances pertaining to the VIE.

VIEs are required to be consolidated by their primary beneficiary. The primary beneficiary of a VIE is determined to be the party that has both the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. This determination may involve complex and subjective analyses. In general, the obligation to absorb losses is a function of holding a majority of the first loss tranche, while the ability to direct the activities that most significantly impact the VIEs economic performance will be determined based upon the rights associated with acting as the directing certificate holder, or equivalent, in a given transaction. The Company is required to reconsider its evaluation of whether to consolidate a VIE each reporting period based upon changes in the facts and circumstances pertaining to the VIE.

The Company has evaluated its Non-Agency RMBS and Multi-Family MBS investments to determine if each represents a variable interest in a VIE. The Company monitors these investments and analyzes them for potential consolidation. The Company's real estate securities investments represent variable interests in VIEs. At September 30, 2017, the Company determined that it continues to be the primary beneficiary of two Multi-Family MBS transactions (FREMF 2011-K13 and FREMF 2012-KF01), and one residential mortgage loan transaction (CSMC 2014-OAK1), in each case based on its power to direct the trust’s activities and its obligations to absorb losses derived from the ownership of the first-loss tranches. In the case of the FREMF 2011-K13 and the FREMF 2012-KF01trusts, the Company determined that it is the primary beneficiary of certain intermediate trusts that have the power to direct the activities and the obligations to absorb losses of the underlying trusts. Accordingly, the Company consolidated the assets, liabilities, income and expenses of each of the underlying trusts, and has elected the fair value option in respect of the assets and liabilities of each trust. However, the Company's maximum exposure to loss from consolidated trusts was $26,740,446 and $24,716,861, respectively, at September 30, 2017, and December 31, 2016. At September 30, 2017 and December 31, 2016, with the exception of the listed transactions, the maximum exposure of the Company to VIEs was limited to the fair value of its investment in Non-Agency RMBS and Multi-Family MBS as disclosed in Note 4 (Non-Agency RMBS $0 and $7,592,802, respectively, and Multi-Family MBS $30,750,419 and $73,146,566, respectively).

GAAP also requires the Company to consider whether securitizations it sponsors and other transfers of financial assets should be treated as sales or financings. During the year ended December 31, 2015, the Company transferred residential mortgage loans with an aggregate unpaid principal balance of $518,455,163 to Oaks Mortgage Trust Series 2015-1 and Oaks Mortgage Trust Series 2015-2, and accounted for these transfers as sales for financial reporting purposes, in accordance with Accounting Standards Codification (“ASC”) 860. The Company also determined that it was not the primary beneficiary of these VIEs because it lacked the power to direct the activities that will have the most significant economic impact on the entities, and as September 30, 2017, this remains the case. The Company’s analysis incorporates the considerations applicable to Consolidation (Topic 810). The Company’s determination involves complex and subjective analysis resulting from the various legal and structural aspects of each transaction. This analysis has focused in particular on ASC 810-10-25-38C and 25-38D, along with ASC 810-10-25-38G and ASC 810-10-15-13A and 15-13B. The Company’s maximum exposure to loss from these VIEs was limited to the fair value of its investments in Non-Agency RMBS issued by the two VIEs, with an aggregate fair value of $0 at September 30, 2017 (December 31, 2016: $4,413,403). This amount is included in Available-for-sale (“AFS”) securities on the Company’s condensed consolidated balance sheet. The Company is party to customary and standard repurchase obligations in respect of loans that it has sold to the two VIEs to the extent they have breached standard representations and warranties, but is not a party to arrangements to provide financial support to the VIEs that the Company believes could expose it to additional loss.

Use of Estimates

The financial statements have been prepared on the accrual basis of accounting in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires the Company to make a number of significant estimates. These include estimates of fair value of certain assets and liabilities, amount and timing of credit losses, prepayment rates, and other estimates that affect the reported amounts of certain assets and liabilities as of the date of the financial statements and the reported amounts of certain revenues and expenses during the reported period. It is likely that changes in these estimates (e.g. valuation changes due to supply and demand, credit performance, prepayments, interest rates, or other reasons) will occur in the near term. The Company’s estimates are inherently subjective in nature and actual results could differ from its estimates and the differences may be material.

Cash and Cash Equivalents and Restricted Cash

Cash and cash equivalents include cash held in bank accounts on an overnight basis and other short term deposit accounts with banks having original maturities of 90 days or less. The Company maintains its cash and cash equivalents in highly rated financial institutions, and at times these balances exceed insurable amounts.


9




FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Restricted cash represents the Company’s cash held by counterparties as collateral against the Company’s securities, derivatives and/or repurchase agreements. Cash held by counterparties as collateral is not available to the Company for general corporate purposes, but may be applied against amounts due to securities, derivatives or repurchase counterparties or returned to the Company when the collateral requirements are exceeded, or at the maturity of the derivative or repurchase agreement.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheet that sum to the total of the same amounts shown in the statement of cash flows.
 
September 30, 2017
 
December 31, 2016
Cash and cash equivalents
$
30,554,867

 
$
27,534,374

Restricted cash
15,437,341

 
10,355,222

Total cash, cash equivalents and restricted cash
$
45,992,208

 
$
37,889,596


Deferred Income

Certain service revenues received in the period are recorded as a liability in the Company’s condensed consolidated balance sheets in the line item “Deferred income”, for subsequent recognition as income in the Company’s condensed consolidated statements of operations.

Deferred Offering Costs

In accordance with ASC Subtopic 505-10, the direct costs incurred to issue shares classified as equity, such as legal and accounting fees, should be deducted from the related proceeds and the net amount recorded as stockholders’ equity. Accordingly, payments made by the Company in respect of such costs related to the issuance of shares are recorded as an asset in the accompanying condensed consolidated balance sheets in the line item “Deferred offering costs”, for subsequent deduction from the related proceeds upon closing of the offering.

To the extent that certain costs, in particular legal fees, are known to have been accrued but have not yet been invoiced and paid, they are included in “Other accounts payable and accrued expenses” on the accompanying condensed consolidated balance sheets.

Available-for-Sale Securities, at Fair Value

Revenue Recognition, Premium Amortization, and Discount Accretion

Interest income on the Company’s AFS securities portfolio, with the exception of Non-Agency RMBS IOs (as further described below), is accrued based on the actual coupon rate and the outstanding principal balance of such securities. The Company recognizes interest income using the effective interest method for all AFS securities. As such, premiums and discounts are amortized or accreted into interest income over the lives of the securities in accordance with ASC 310-20, “Nonrefundable Fees and Other Costs”, ASC 320-10, “Investments - Debt and Equity Securities” or ASC 325-40, “Beneficial Interests in Securitized Financial Assets”, as applicable. Total interest income is recorded in the “Interest Income” line item on the condensed consolidated statements of operations.

On at least a quarterly basis for securities accounted for under ASC 320-10 and ASC 310-20 (generally Agency RMBS), prepayments of the underlying collateral must be estimated, which directly affect the speed at which the Company amortizes such securities. If actual and anticipated cash flows differ from previous estimates, the Company recognizes a “catch-up” adjustment in the current period to the amortization of premiums for the impact of the cumulative change in the effective yield through the reporting date.

Similarly, the Company also reassesses the cash flows on at least a quarterly basis for securities accounted for under ASC 325-40 and ASC 310-30 (generally Non-Agency RMBS and Multi-Family MBS). In estimating these cash flows, there are a number of assumptions that are subject to uncertainties and contingencies. These include the rate and timing of principal and interest receipts (including assumptions of prepayments, repurchases, defaults and liquidations), the pass-through or coupon rate and interest rate fluctuations. In addition, interest payment shortfalls due to delinquencies on the underlying mortgage loans have to be judgmentally estimated. Differences between previously estimated cash flows and current actual and anticipated cash flows are recognized prospectively through an adjustment of the yield over the remaining life of the security based on the current amortized cost of the investment as adjusted for credit impairment, if any.

For investments purchased with evidence of deterioration of credit quality for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable, the Company applies the provisions of ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” ASC 310-30 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. ASC 310-30 limits the yield that may be accreted (accretable yield) to the excess of the investor’s estimate of undiscounted expected principal, interest and other cash flows (cash flows expected at acquisition to be collected) over the investor’s initial investment in the loan. ASC 310-30 requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield, loss accrual or valuation allowance.

Subsequent increases in cash flows expected to be collected are generally recognized prospectively through adjustment of the investment’s yield over its remaining life. Decreases in cash flows expected to be collected are recognized as impairment to the extent that such decreases are due, at least in part, to an increase in credit loss expectations (“credit impairment”). To the extent that decreases in cash flows expected to be collected are the result of factors other than credit impairment, for example a change in rate of prepayments, such changes are generally recognized prospectively through adjustment of the investment’s yield over its remaining life.


10




FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Company’s accrual of interest, discount and premium for U.S. federal and other tax purposes is likely to differ from the financial accounting treatment of these items as described above.

Gains and losses from the sale of AFS securities are recorded as realized gains (losses) within realized gain (loss) on sale of investments, net in the Company's condensed consolidated statements of operations. Upon the sale of a security, the Company will determine the cost of the security and the amount of unrealized gains or losses to reclassify out of accumulated other comprehensive income (loss) into earnings based on the specific identification method. Unrealized gains and losses on the Company’s AFS securities are recorded as unrealized gain (loss) on available-for-sale securities, net in the Company's condensed consolidated statements of comprehensive income (loss).

Impairment

The Company evaluates its MBS, on a quarterly basis, to assess whether a decline in the fair value of an AFS security below the Company's amortized cost basis is an other-than-temporary impairment (“OTTI”). The presence of OTTI is based upon a fair value decline below a security's amortized cost basis and a corresponding adverse change in expected cash flows due to credit related factors as well as non-credit factors, such as changes in interest rates and market spreads. Impairment is considered other-than-temporary if an entity (i) intends to sell the security, (ii) will more likely than not be required to sell the security before it recovers in value or (iii) does not expect to recover the security's amortized cost basis, even if the entity does not intend to sell the security. Under these scenarios, the impairment is other-than-temporary and the full amount of impairment should be recognized currently in earnings and the cost basis of the investment security is adjusted. However, if an entity does not intend to sell the impaired debt security and it is more likely than not that it will not be required to sell before recovery, an OTTI should be recognized to the extent that a decrease in future cash flows expected to be collected is due, at least in part, to an increase in credit impairment. A decrease in future cash flows due to factors other than credit, for example a change in the rate of prepayments, is considered a non-credit impairment. The full amount of the difference between the security’s previous and new cost basis resulting from credit impairment is recognized currently in earnings, and the difference between the new amortized cost basis and the cash flows expected to be collected is accreted as interest income in accordance with the effective interest method. Decreases in cash flows expected to be collected resulting from non-credit impairment are generally recognized prospectively through adjustment of the investment’s yield over its remaining life.

Mortgage Loans Held-for-Sale, at Fair Value

Mortgage loans held-for-sale are reported at fair value as a result of a fair value option election. See Note 3 - Fair Value Measurements for details on fair value measurement. Mortgage loans are currently classified as held-for-sale based upon the Company’s intent to sell them in the secondary whole loan market.

Interest income on mortgage loans held-for-sale is recognized at the loan coupon rate. Interest income recognition is suspended when mortgage loans are placed on non-accrual status. The accrual of interest on loans is discontinued when, in management’s opinion, the interest is considered non-collectible, and in all cases when payment becomes greater than 90 days past due. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.

Multi-Family and Residential Mortgage Loans Held in Securitization Trusts

Multi-family and residential mortgage loans held in consolidated securitization trusts are comprised of multi-family mortgage loans held in the FREMF 2011-K13 Trust and the FREMF 2012-KF01Trust, and residential mortgage loans held in the CSMC 2014-OAK1 Trust, as of September 30, 2017. Based on a number of factors, the Company determined that it was the primary beneficiary of the VIEs underlying the trusts, met the criteria for consolidation and, accordingly, has consolidated the three trusts, including their assets, liabilities, income and expenses in its financial statements. The Company has elected the fair value option on each of the assets and liabilities held within the trusts. See Note 3 - Fair Value Measurement below for additional detail. As the result of the Company’s determination that it is not the primary beneficiary of JPMMT 2014-OAK4, Oaks Mortgage Trust Series 2015-1 and Oaks Mortgage Trust Series 2015-2, it does not consolidate these trusts.

Interest income on multi-family and residential mortgage loans held in securitization trusts is recognized at the loan coupon rate. Interest income recognition is suspended when mortgage loans are placed on non-accrual status. The accrual of interest on loans is discontinued when, in management’s opinion, the interest is considered non-collectible, and in all cases when payment becomes greater than 90 days past due. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.

Mortgage Servicing Rights and Excess Servicing Rights, at Fair Value

Mortgage servicing rights (“MSRs”) are associated with residential mortgage loans that the Company has purchased and subsequently sold or securitized. MSRs are held and managed at the Company’s TRS. As the owner of MSRs, the Company is entitled to receive a portion of the interest payments from the associated residential mortgage loan, and is obligated to service directly or through a sub-servicer, the associated loan. MSRs are reported at fair value as a result of a fair value option election. See Note 3 - Fair Value Measurement below for additional detail. Residential mortgage loans for which the Company owns the MSRs are directly serviced by one or more sub-servicers retained by the Company, since the Company does not directly service any residential mortgage loans.

MSR income is recognized at the contractually agreed rate, net of the costs of sub-servicers retained by the Company. If a sub-servicer with which the Company contracts were to default, an evaluation of MSR assets for impairment would be undertaken at that time.

To the extent that the Company determines it is the primary beneficiary of a residential mortgage loan securitization trust into which it has sold loans, any associated MSRs are eliminated on the consolidation of the trust. The trust is contractually obligated to pay a portion of the interest payments from the associated residential mortgage loans for the direct servicing of the loans, and after deduction of sub-servicing fees payable to contracted sub-servicers, the net amount, excess servicing rights, represents a liability of the trust. See Note 3 - Fair Value Measurement below for additional detail.




11




FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Non-Agency RMBS IOs, at Fair Value

Non-Agency RMBS IOs that the Company owns are associated with residential mortgage loan securitizations that the Company has previously sponsored, and are reported at fair value as a result of a fair value option election. See Note 3 - Fair Value Measurements for details on fair value measurement. Interest income on IOs is recognized at the contractually agreed rate, and changes in fair value are recognized in the Company’s condensed consolidated statement of operations.

Repurchase Agreements

The Company finances the acquisition of certain of its mortgage-backed securities through the use of repurchase agreements. The repurchase agreements are generally short-term debt, which expire within one year. Borrowings under repurchase agreements generally bear interest rates at a specified margin over LIBOR and are generally uncommitted. In accordance with ASC 860 “Transfers and Servicing” the Company accounts for the repurchase agreements as collateralized financing transactions and they are carried at their contractual amounts, as specified in the respective agreements. The contractual amounts approximate fair value due to their short-term nature.

Residential Loan Warehouse Facilities

The Company previously financed the acquisition of certain of its residential mortgage loans through the use of short-term, uncommitted residential loan warehouse facilities, which were structured as repurchase agreements. The Company accounted for outstandings under these facilities as collateralized financing transactions which were carried at their contractual amounts, and approximated fair value due to their short-term nature.

Secured Loans

In February 2015, the Company’s wholly owned subsidiary, FOI, became a member of the Federal Home Loan Bank of Indianapolis (“FHLBI”). As a member of FHLBI, FOI borrowed funds from FHLBI in the form of secured advances (“FHLB advances”). FHLB advances were treated as secured financing transactions and were carried at their contractual amounts. In connection with FHLB advances, FOI was required to purchase FHLBI stock, which was recorded on the Company’s condensed consolidated balance sheet as an asset. All FHLB stock was redeemed and all FHLB advances were repaid during 2016.

Multi-Family and Residential Securitized Debt Obligations

Multi-family and residential securitized debt obligations represent third-party liabilities of the FREMF 2011-K13 Trust, FREMF 2012-KF01 Trust and CSMC 2014-OAK1 Trust, and excludes liabilities of the trust acquired by the Company that are eliminated on consolidation. The third-party obligations of each trust do not have any recourse to the Company as the consolidator of each trust.

Backstop Guarantees

The Company, through FOAC and in return for fees, provides seller eligibility and backup guarantee services in respect of residential mortgage loans that are traded through one or more loan exchanges operated by MAXEX LLC ("MAXEX"). See Note 14 and 15 for additional information regarding MAXEX. To the extent that a loan seller approved by FOAC fails to honor its obligations to repurchase one or more loans based on an arbitration finding that such seller has breached its representations and warranties, FOAC provides a backstop guarantee of the repurchase obligation. The Company has evaluated its backstop guarantees pursuant to ASC 460, Guarantees, and has determined them to be performance guarantees, for which ASC 460 contains initial recognition and measurement requirements, and related disclosure requirements. FOAC is obligated in two respects: (i) a noncontingent liability, which represents FOAC's obligation to stand ready to perform under the terms of the guarantee in the event that the specified triggering event(s) occur, and (ii) the contingent liability, which represents FOAC's obligation to make future payments if those triggering events occur. FOAC recognizes the noncontingent liability at the inception of the guarantee at the fair value, which is the fee received or receivable, and is recorded on the Company's condensed consolidated balance sheet as a liability in the line item "Deferred income." The Company amortizes these fees into income on a straight-line basis over five years, based on an assumed constant prepayment rate of 15% for residential mortgage loans and other observable data. The Company's contingent liability is accounted for pursuant to ASC 450, Contingencies, pursuant to which the contingent liability must be recognized when its payment becomes probable and reasonably estimable.

Common Stock

At September 30, 2017, and December 31, 2016, the Company was authorized to issue up to 450,000,000 shares of common stock, par value $0.01 per share, with such designations, voting and other rights and preferences as may be determined from time to time by the Company’s Board of Directors. The Company had 22,139,258 shares of common stock issued and outstanding at September 30, 2017 and 17,539,258 at December 31, 2016.

Stock Repurchase Program

On December 15, 2015, the Company’s Board of Directors authorized a stock repurchase program (“Repurchase Program”), to repurchase up to $10 million of the Company’s outstanding common stock. Subject to applicable securities laws, repurchase of common stock under the Repurchase Program may be made at times and in amounts as the Company deems appropriate, using available cash resources. Shares of common stock repurchased by the Company under the Repurchase Program, if any, will be canceled and, until reissued by the Company, will be deemed to be authorized but unissued shares of common stock. The Repurchase Program may be suspended or discontinued by the Company at any time and without prior notice. As of December 31, 2016, the Company had repurchased 126,856 shares of common stock at a weighted average share price of $5.09. There has been no activity in 2017. As of September 30, 2017, $9.4 million of common stock remained authorized for future share repurchases under the Repurchase Program.






12




FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Preferred Stock

At September 30, 2017, and December 31, 2016, the Company was authorized to issue up to 50,000,000 share of preferred stock, par value $0.01 per share, with such designations, voting and other rights and preferences as may be determined from time to time by the Company’s Board. The Company had 1,610,000 shares of preferred stock issued and outstanding at both September 30, 2017 and December 31, 2016.

Income Taxes

The Company has elected to be taxed as a REIT under the Code for U.S. federal income tax purposes, commencing with the Company’s short taxable period ended December 31, 2012. So long as the Company qualifies as a REIT, with the exception of our taxable REIT subsidiaries, the Company generally will not be subject to U.S. federal income taxes on its taxable income to the extent it annually distributes at least 90% of its net taxable income to stockholders and maintains its qualification as a REIT.

In addition to the Company’s election to be taxed as a REIT, the Company complies with Sections 856 through 859 of the Code. Accordingly, the Company generally will not be subject to U.S. federal income tax to the extent of its distributions to stockholders and as long as certain asset, income and share ownership tests are met. To maintain its qualification as a REIT, the Company must distribute at least 90% of its REIT taxable income to its stockholders and meet certain other requirements. The Company may also be subject to certain state, local and franchise taxes. Under certain circumstances, federal income and excise taxes may be due on its undistributed taxable income. If the Company were to fail to meet these requirements, it would be subject to U.S. federal income tax, which could have a material adverse impact on its results of operations and amounts available for distributions to its stockholders. The Company believes it will meet all of the criteria to maintain the Company's REIT qualification for the applicable periods, but there can be no assurance that these criteria will continue to be met in subsequent periods.

The Company assesses its tax positions for all open tax years and determines whether the Company has any material unrecognized liabilities in accordance with ASC 740, Income Taxes. The Company records these liabilities to the extent the Company deems them more likely than not to be incurred. The Company's accounting policy with respect to interest and penalties is to classify these amounts as other interest expense. As further described in Note 19, the Company declared and paid in the fourth quarter of 2016 a deficiency dividend relating to a determination of an inability to offset certain net gains on hedging transactions in 2013 against net capital losses on the sale of certain mortgage-backed securities. In connection with this declaration, during the first quarter of 2017, the Company paid an amount of $2.01 million for interest charges to the IRS. The Company previously provisioned $1.86 million in the third quarter of 2016 in the Company’s condensed consolidated balance sheets in the line item “Other accounts payable and accrued expenses”; the remaining balance of $0.15 million was expensed in the first quarter of 2017, which is included in “Other interest expense” in the Company’s condensed consolidated statements of operations. The first quarter 2017 payment of $2.01 million is included in "cash paid for interest" in the Company's condensed consolidated statements of cash flows.

Certain activities of the Company are conducted through a TRS and therefore are taxed as a standalone U.S. C-Corporation. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

If a TRS generates net income, the TRS can declare dividends to the Company which will be included in its taxable income and necessitate a distribution to its stockholders. Conversely, if the Company retains earnings at a TRS level, no distribution is required and the Company can increase book equity of the consolidated entity.

Earnings per Share

The Company calculates basic and diluted earnings per share by dividing net income attributable to common stockholders for the period by the weighted-average shares of the Company’s common stock outstanding for that period. Diluted earnings per share takes into account the effect of dilutive instruments, such as warrants, stock options, and unvested restricted stock, but use the average share price for the period in determining the number of incremental shares that are to be added to the weighted-average number of shares outstanding. See Note 17 for details of the computation of basic and diluted earnings per share.

Stock-Based Compensation

The Company is required to recognize compensation costs relating to stock-based payment transactions in the financial statements. The Company accounts for share-based compensation issued to its Manager and non-management directors using the fair value based methodology prescribed by ASC 505, Equity ("ASC 505"), or ASC 718, Share-Based Payment (“ASC 718”), as appropriate. Compensation cost related to restricted common stock issued to the Manager is initially measured at estimated fair value at the grant date, and is remeasured on subsequent dates to the extent the awards are unvested. Additionally, compensation cost related to restricted common stock issued to the non-management directors is measured at its estimated fair value at the grant date and amortized and expensed over the vesting period. See Note 14 for details of stock-based awards issuable under the Manager Equity Plan.

Comprehensive Income (Loss) Attributable to Common Stockholders

Comprehensive income (loss) is comprised of net income (loss), as presented in the condensed consolidated statement of comprehensive income (loss), adjusted for changes in unrealized gain or loss on AFS securities (excluding Non-Agency RMBS IOs), reclassification adjustments for net gain (loss) and other-than-temporary impairments included in net income (loss) and dividends paid to preferred stockholders.






13




FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Issued and/or Adopted Accounting Standards

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU No. 2014-09, which is a comprehensive revenue recognition standard that supersedes virtually all existing revenue guidance under GAAP. ASU 2014-09 also creates a new topic in the Codification, Topic 606 ("ASC 606"). In addition to superseding and replacing nearly all existing GAAP revenue recognition guidance, including industry-specific guidance, ASC 606 does the following: (1) established a new control-based revenue recognition model; (2) changes the basis for deciding when revenue is recognized over time or at a point in time; (3) provides new and more detailed guidance on specific aspects of revenue recognition; and (4) expands and improves disclosures about revenue. As a result of the issuance of ASU No. 2015-14 in August 2015, deferring the effective date of ASU No. 2014-09 by one year, the ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017, with early adoption prohibited.

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.” The amendments make targeted improvements to clarify the principal versus agent assessment and are intended to make the guidance more operable and lead to more consistent application. The amendments in this update are effective immediately.

ASC 606 applies to all contracts with customers with exceptions for financial instruments and other contractual rights or obligations that are within the scope of other ASC Topics. Exclusions from the scope of ASC 606 include investment securities available for sale (subject to ASC 320, Investments - Debt and Equity Securities or ASC 325, Investments - Other); residential mortgage loans and multi-family loans (subject to either ASC 310, Receivables or ASC 825, Financial Instruments); and derivative assets and derivative liabilities (subject to ASC 815, Derivatives and Hedging). The Company evaluated the applicability of this ASU with respect to its investment portfolio, considering the scope exceptions listed above, and has determined that the adoption of this ASU will not have a material impact on the Company's financial condition or results of operations as the substantial majority of the Company's revenue is generated by financial instruments and other contractual rights and obligations that are not within the scope of ASC 606.


Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU No. 2016-01, which changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. The ASU requires certain recurring disclosures and is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017, with early adoption permitted. The Company has determined this ASU will not have a material impact on the Company's financial condition or results of operation.

Stock Compensation

In March 2016, the FASB issued ASU 2016-09, effective January 1, 2017, which simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities. The areas for simplifications in the update involve several aspects of the accounting for share-based payment transactions, including income tax consequences, classifications of awards as either equity or liabilities, and classification on the statement of cash flows. The Company has determined this ASU will not have a material impact on the Company's financial condition or results of operation.

Credit Losses

In June 2016, the FASB issued ASU 2016-13 which is a comprehensive amendment of credit losses on financial instruments. Currently GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The standard’s core principle is that an entity replaces the “incurred loss” impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For public business entities that are SEC filers, the amendment in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company continued to assess the impact of this guidance.

Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued ASU 2016-15, which amends ASC Topic 230, Statement of Cash Flows (“ASC 230”), to reduce diversity in how certain transactions are classified in the statement of cash flows. The ASU is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company has determined this ASU will not have a material impact on the Company's financial condition or results of operation.

Interests Held through Related Parties That Are under Common Control

In October 2016, the FASB issued ASU 2016-17, to amend the consolidation guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The ASU is effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company has determined this ASU has not had a material impact on the Company's financial condition or results of operation.

Restricted Cash

In November 2016, the FASB issued ASU 2016-18, which amends ASC Topic 230, Statement of Cash Flows, to reduce diversity in how entities present restricted cash and restricted cash equivalents in the statement of cash flows. The amendments in ASU 2016-18 require restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and of end-of-period total amounts shown on the statement of cash flows.

14




FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early application is permitted, provided that all of the amendments are adopted in the same period. The amendments of this ASU should generally be applied using a retrospective transition method to each period presented. The Company adopted the ASU beginning with the first quarter of 2017. The prior period consolidated statement of cash flows has been retrospectively adjusted to conform to this presentation.

NOTE 3 - FAIR VALUE MEASUREMENTS

The Company discloses the fair value of its financial instruments according to a fair value hierarchy (Levels 1, 2 and 3, as defined). In accordance with GAAP, the Company is required to provide enhanced disclosures regarding instruments in the Level 3 category (which require significant management judgment), including a separate reconciliation of the beginning and ending balances for each major category of assets and liabilities. Additionally, GAAP permits entities to choose to measure many financial instruments and certain other items at fair value (the “fair value option”), and the election of such choice is irrevocable. Unrealized gains and losses on items for which the fair value option has been elected are irrevocably recognized in earnings at each subsequent reporting date.

Available-for-sale Securities

The Company currently invests in Agency RMBS, Multi-Family MBS and Non-Agency RMBS.

Designation

The Company classifies its MBS securities as AFS investments. Although the Company generally intends to hold most of its investment securities until maturity, it may, from time to time, sell any of its investment securities as part of the overall management of its portfolio. All assets classified as AFS, except Non-Agency RMBS IOs, are reported at estimated fair value, with unrealized gains and losses, excluding other than temporary impairments, included in accumulated other comprehensive income, a separate component of shareholders' equity. As the result of a fair value election, unrealized gains and losses on Non-Agency RMBS IOs are recorded in the Company’s condensed consolidated statement of operations.

Determination of MBS Fair Value

The Company determines the fair values for the Agency RMBS, Multi-Family MBS and Non-Agency RMBS in its portfolio based on obtaining a valuation for each Agency RMBS, Multi-Family MBS and Non-Agency RMBS from third-party pricing services, and may also obtain dealer quotes, as described below. The third-party pricing services use common market pricing methods that may include pricing models that may incorporate such factors as coupons, prepayment speeds, spread to the Treasury curves and interest rate swap curves, duration, periodic and life caps and credit enhancement, as applicable. The dealers incorporate common market pricing methods, including a spread measurement to the Treasury curve or interest rate swap curve as well as underlying characteristics of the particular security, including coupon, periodic and life caps, collateral type, rate reset period and seasoning or age of the security, as applicable.

The Company obtains pricing data from a primary third-party pricing service for each Agency RMBS, Multi-Family MBS and Non-Agency RMBS. If other available market data indicates that the pricing data from the primary third-party service is materially inaccurate, or pricing data is unavailable from the primary third-party pricing service, the Company undertakes a review of other available prices and takes additional steps to determine fair value. In all cases, the Company validates its understanding of methodology and assumptions underlying the fair value used. The Company determines that the pricing data from the primary third-party service is materially inaccurate if it is not materially representative of where a specific security can be traded in the normal course of business. In making such determination, the Company follows a series of steps, including review of collateral marks from margin departments of repurchase agreement counterparties, utilization of bid list, inventory list and extensive unofficial market color, review of other third-party pricing service data and a yield analysis of each Multi-Family MBS and Non-Agency RMBS based on the pricing data from the primary third-party pricing service and the Company’s cash flow assumptions.

The Company reviews all pricing of Agency and Non-Agency RMBS and Multi-Family MBS used to ensure that current market conditions are properly represented. This review includes, but is not limited to, comparisons of similar market transactions or alternative third-party pricing services, dealer quotes and comparisons to a pricing model. Values obtained from the third-party pricing service for similar instruments are classified as Level 2 securities if the pricing methods used are consistent with the Level 2 definition. If quoted prices for a security are not reasonably available from the pricing service, but dealer quotes are, the Company classifies the security as a Level 2 security. If neither is available, the Company determines the fair value based on characteristics of the security that are received from the issuer and based on available market information received from dealers and classifies it as a Level 3 security.

Mortgage Loans Held-for-Sale

Designation

The Company currently classifies its residential mortgage loans as held-for-sale (“HFS”) investments. HFS residential mortgage loans include loans that the Company is marketing for sale to third parties.

The Company has elected the fair value option for residential mortgage loans it has acquired and classifies as HFS. The fair value option was elected to help mitigate earnings volatility by better matching the asset accounting with any related hedges. The Company’s policy is to record separately interest income on these fair value elected loans. Additionally, upfront costs related to these loans are not deferred or capitalized. Fair value adjustments are reported in unrealized gain (loss) on mortgage loans held-for-sale on the condensed consolidated statements of operations. The fair value option is irrevocable once the loan is acquired.

Determination of Mortgage Loan Fair Value

The Company determines the fair values of the mortgage loans in its portfolio from third-party pricing services. The third-party pricing services use common market pricing methods which may include pricing models that may incorporate such factors as coupons, prepayment speeds, spread to the Treasury curves and interest rate swap curves, duration, periodic and life caps, as applicable. In addition, the third-party pricing services benchmark their pricing models against observable pricing levels being quoted by a range of market participants active in the purchase and sale of residential mortgage loans.

15




FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (unaudited)
NOTE 3 - FAIR VALUE MEASUREMENTS (Continued)


The Company obtains pricing data from a primary third-party pricing service for each mortgage loan. If other available market data indicates that the pricing data from the primary third-party service is materially inaccurate, or pricing data is unavailable from the primary third-party pricing service, the Company undertakes a review of other available prices and takes additional steps to determine fair value. In all cases, the Company validates its understanding of methodology and assumptions underlying the fair value used. The Company determines that the pricing data from the primary third-party service is materially inaccurate if it is not materially representative of the price at which a specific loan can be traded in the normal course of business.

The Company reviews all pricing of mortgage loans used to ensure that current market conditions are properly represented. This review includes, but is not limited to, comparisons of similar market transactions or alternative third-party pricing services, dealer quotes and comparisons to a pricing model. Values obtained from the third-party pricing service for similar instruments are classified as Level 2 assets if the pricing methods used are consistent with the Level 2 definition. If quoted prices for a loan are not reasonably available from the pricing service, but alternative quotes are, the Company classifies the loan as a Level 2 asset. If neither is available, the Company determines the fair value based on characteristics of the loan and based on other available market information and classifies it as a Level 3 asset.

MSRs and Excess Servicing Rights

Designation

MSRs are associated with residential mortgage loans that the Company has purchased and subsequently sold or securitized, and are typically acquired directly from loan originators and recognized at the time that loans have been transferred to a third party or a securitization, in each case providing such transfer has met the GAAP criteria for sale. The Company retains the rights to service certain loans that it has sold or securitized, but employs one or more sub-servicers to perform the servicing activities.

To the extent that the Company determines it is the primary beneficiary of a residential mortgage loan securitization trust into which it has sold loans, any associated MSRs are eliminated on the consolidation of the trust. The trust is contractually obligated to pay a portion of the interest payments from the associated residential mortgage loans for the direct servicing of the loans, and after deduction of sub-servicing fees payable to contracted sub-servicers, the net amount, excess servicing rights, represents a liability of the trust. Upon consolidation of the trust, the fair value of the excess servicing rights is equal to the related MSRs held at the Company’s TRS.

The Company has elected the fair value option in respect of MSRs and excess servicing rights.

Determination of Fair Value

The Company determines the fair value of its MSRs and excess servicing rights from third-party pricing services. The third-party pricing services use common market pricing methods that include market discount rates, prepayment speeds of serviced loans, the market cost of servicing, and observed market pricing for MSR purchase and sale transactions. Changes in the fair value of MSRs occur primarily as a result of the collection and realization of expected cashflows, as well as changes in valuation inputs and assumptions.

The Company obtains MSR pricing data from a primary third-party pricing service, and validates its understanding of methodology and assumptions underlying the fair value used. Fair values are estimated based on applying inputs to generate the net present value of estimated net servicing income, and as a consequence of the fact that these discounted cash flow models utilize certain significant unobservable inputs and observable MSR purchase and sale transactions are relatively infrequent, the Company classifies MSRs as a Level 3 asset.

See Note 12 for a further presentation on MSRs.

Multi-Family Mortgage Loans Held in Securitization Trusts and Multi-Family Securitized Debt Obligations

Designation

Multi-family mortgage loans held in consolidated securitization trusts are comprised of multi-family mortgage loans held in the FREMF 2011-K13 Trust and the FREMF 2012-KF01 Trust as of September 30, 2017. Based on a number of factors, the Company determined that it was the primary beneficiary of the VIEs underlying the trusts, met the criteria for consolidation and, accordingly, has consolidated the FREMF 2011-K13 Trust and the FREMF 2012-KF01 Trust, including their assets, liabilities, income and expenses in its financial statements. The Company has elected the fair value option on each of the assets and liabilities held within these trusts.

Determination of Fair Value

In accordance with ASU 2014-13, the Company has elected the fair value option in respect of the assets and liabilities of the FREMF 2011-K13 Trust and the FREMF 2012-KF01 Trust. The trusts are “static”, that is no reinvestment is permitted and there is very limited active management of the underlying assets. Under the ASU, the Company is required to determine whether the fair value of the financial assets or the fair value of the financial liabilities of each of the trusts is more observable, but in either case, the methodology results in the fair value of the assets of each of the trusts being equal to the fair value of their liabilities. The Company has determined that the fair value of the liabilities of each of the trusts is more observable, since in all cases prices for the liabilities are available from the primary third-party pricing service utilized for Multi-Family MBS, while the individual assets of each of the trusts are inherently incapable of precise measurement given their illiquid nature and the limitations on available information related to these assets. Given that the Company’s methodology for valuing the assets of the trusts is an aggregate value derived from the fair value of the trust liabilities, the Company has determined that the valuation of the trust assets in their entirety should be classified as Level 2 valuations.

Residential Mortgage Loans Held in Securitization Trusts and Residential Securitized Debt Obligations

16




FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (unaudited)
NOTE 3 - FAIR VALUE MEASUREMENTS (Continued)


Designation

Residential mortgage loans held in consolidated securitization trusts are comprised of residential mortgage loans held in the CSMC 2014-OAK1 Trust as of September 30, 2017. Based on a number of factors, the Company determined that it was the primary beneficiary of the VIE underlying the trust, met the criteria for consolidation and, accordingly, has consolidated the CSMC 2014-OAK1 Trust including its assets, liabilities, income and expenses in its financial statements. The Company has elected the fair value option on each of the assets and liabilities held within the trust. As the result of the Company’s determination that it is not the primary beneficiary of JPMMT 2014-OAK4, Oaks Mortgage Trust Series 2015-1 and Oaks Mortgage Trust Series 2015-2, it does not consolidate these trusts.

Determination of Fair Value

In accordance with ASU 2014-13, the Company has elected the fair value option in respect of the assets and liabilities of the CSMC 2014-OAK1 Trust. The trust is “static”, that is no reinvestment is permitted and there is very limited active management of the underlying assets. Under the ASU, the Company is required to determine whether the fair value of the financial assets or the fair value of the financial liabilities of the trust is more observable, but in either case, the methodology results in the fair value of the assets of the trust being equal to the fair value of its liabilities. The Company has determined that the fair value of the liabilities of the trust is more observable, since in all cases prices for the liabilities are available from the primary third-party pricing service utilized for Non-Agency RMBS, with the exception of the excess servicing rights, which are available from an alternative third-party pricing service. While the individual assets of the trust, i.e. the underlying residential mortgage loans, are capable of being priced, the Company has determined that the pricing of the liabilities is more easily and readily determined. Given that the Company’s methodology for valuing the assets of the trust is an aggregate value derived from the fair value of the trust’s liabilities, the Company has determined that the valuation of the trust assets in their entirety should be classified as Level 2 valuations.

Accounting for Derivative Financial Instruments

In accordance with FASB guidance ASC 815 “Derivatives and Hedging”, all derivative financial instruments, whether designated for hedging relationships or not, are recorded at fair value on the condensed consolidated balance sheet as assets or liabilities. The Company obtains valuation information for each derivative financial instrument from the related derivative counterparty. If other available market data indicates that the valuation information from the counterparty is materially inaccurate, or pricing data is unavailable from the counterparty, the Company shall undertake a review of other available valuation information, including third party pricing services and/or dealers, and shall take additional steps to determine fair value. The Company reviews all valuations of derivative financial instruments used to ensure that current market conditions are properly represented. This review includes, but is not limited to, comparisons of similar market transactions or alternative third-party pricing services, dealer quotes and comparisons to a pricing model. Values based on quoted prices for similar instruments in active markets, including exchange-traded instruments, are classified as Level 1 valuations. Values obtained from the derivative counterparty, the third-party pricing service or dealers, as appropriate, for similar instruments are classified as Level 2 valuations if the pricing methods used are consistent with the Level 2 definition. If none of these sources is available, the Company determines the fair value based on characteristics of the instrument and based on available market information received from dealers and classifies it as a Level 3 valuation.

At the inception of a derivative contract, the Company determines whether or not the instrument will be part of a qualifying hedge accounting relationship. Due to the volatility of the credit markets and difficulty in effectively matching pricing or cash flows, the Company has elected to treat all current derivative contracts as trading instruments. The changes in fair value of derivatives accounted for as trading instruments are reported in the condensed consolidated statement of operations as unrealized gain (loss) on derivative contracts, net.

The Company enters into interest rate derivative contracts for a variety of reasons, including minimizing significant fluctuations in earnings or market values on certain assets or liabilities that may be caused by changes in interest rates. The Company may, at times, enter into various forward contracts, including short securities, Agency to-be-announced securities (“TBAs”), options, futures, swaps and caps. Due to the nature of these instruments, they may be in a receivable/asset position or a payable/liability position at the end of an accounting period. Amounts payable to, and receivable from, the same party under contracts may be offset as long as the following conditions are met: (a) each of the two parties owes the other determinable amounts; (b) the reporting party has the right to offset the amount owed with the amount owed by the other party; (c) the reporting party intends to offset; and (d) the right of offset is enforceable by law. If the aforementioned conditions are not met, amounts payable to and receivable from are presented by the Company on a gross basis in the condensed consolidated balance sheet.

Other Financial Instruments

The carrying value of short term instruments, including cash and cash equivalents, receivables and repurchase agreements whose term is less than twelve months, generally approximates fair value due to the short term nature of the instruments.

NOTE 4 – AVAILABLE-FOR-SALE SECURITIES

The following table presents the Company’s AFS investment securities by collateral type at fair value as of September 30, 2017 and December 31, 2016:

17




FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (unaudited)
NOTE 4 - AVAILABLE-FOR-SALE SECURITIES (Continued)

 
 
September 30, 2017
 
December 31, 2016
Available-for-sale securities:
 
 

 
 

Agency
 
 

 
 

Federal Home Loan Mortgage Corporation
 
$
524,557,546

 
$
326,958,046

Federal National Mortgage Association
 
749,178,075

 
463,232,187

Non-Agency
 

 
7,592,802

Multi-Family
 
30,750,419

 
73,146,566

Total available-for-sale securities
 
$
1,304,486,040

 
$
870,929,601


The following tables present the amortized cost and fair value of the Company’s AFS investment securities by collateral type as of September 30, 2017 and December 31, 2016:
 
 
September 30, 2017
 
 
Agency
 
Non-Agency
 
Multi-Family
 
Total
Face Value
 
$
1,253,891,405

 
$

 
$
38,666,386

 
$
1,292,557,791

Unamortized premium
 
23,409,353

 

 

 
23,409,353

Unamortized discount
 
 

 
 

 
 

 
 

Net, unamortized
 
(643,743
)
 

 
(7,630,953
)
 
(8,274,696
)
Amortized Cost
 
1,276,657,015

 

 
31,035,433

 
1,307,692,448

Gross unrealized gain
 
1,970,238

 

 
17,043

 
1,987,281

Gross unrealized (loss)
 
(4,891,632
)
 

 
(302,057
)
 
(5,193,689
)
Fair Value
 
$
1,273,735,621

 
$

 
$
30,750,419

 
$
1,304,486,040


 
 
December 31, 2016
 
 
Agency
 
Non-Agency (1)
 
Multi - Family
 
Total
Face Value
 
$
779,219,115

 
$
4,393,771

 
$
100,907,815

 
$
884,520,701

Unamortized premium
 
17,748,138

 

 

 
17,748,138

Unamortized discount
 
 

 
 

 
 

 
 

Designated credit reserve and OTTI (2)
 

 
(1,929,833
)
 

 
(1,929,833
)
Net, unamortized
 
(1,311,292
)
 
(369,887
)
 
(26,160,083
)
 
(27,841,262
)
Amortized Cost
 
795,655,961

 
2,094,051

 
74,747,732

 
872,497,744

Gross unrealized gain
 
2,663,975

 
234,647

 
509,519

 
3,408,141

Gross unrealized (loss)
 
(8,129,703
)
 

 
(2,110,685
)
 
(10,240,388
)
Fair Value
 
$
790,190,233

 
$
2,328,698

 
$
73,146,566

 
$
865,665,497


(1)
Non-Agency AFS does not include interest-only securities with a notional amount of $509,109,248, book value of $14,712,374, unrealized loss of $9,448,270 and a fair value of $5,264,104 as of December 31, 2016.

(2)
Discount designated as Credit Reserve is generally not expected to be accreted into interest income. Amounts disclosed reflect Credit Reserve of $0 and $1,929,833, at September 30, 2017 and December 31, 2016, respectively.

At September 30, 2017, the Company did not intend to sell any of its MBS that were in an unrealized loss position, and it is “more likely than not” that the Company will not be required to sell these MBS before recovery of their amortized cost basis, which may be at their maturity.

The Company did not recognize credit-related OTTI losses through earnings during the nine months ended September 30, 2017. As of September 30, 2016, the Company recognized credit-related losses of $0.37 million on one non-Agency RMBS for the nine months then ended.


18




FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (unaudited)
NOTE 4 - AVAILABLE-FOR-SALE SECURITIES (Continued)

Non-Agency RMBS on which OTTI is recognized have experienced, or are expected to experience, credit-related adverse cash flow changes, or credit impairment. The Company’s estimate of cash flows for its Non-Agency RMBS is based on its review of the underlying mortgage loans securing these RMBS. The Company considers information available about the structure of the securitization, including structural credit enhancement, if any, and the past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, FICO scores at loan origination, year of origination, loan-to-value ratios, geographic concentrations, as well as Rating Agency reports, general market assessments, and dialogue with market participants. Significant judgment is used in both the Company’s analysis of the expected cash flows for its Non-Agency RMBS and any determination of OTTI that is the result, at least in part, of credit impairment. 

The following tables present the composition of OTTI charges recorded by the Company for the three and nine months ended September 30, 2017 and September 30, 2016:
 
 
Three Months Ended
September 30,
 
 
2017
 
2016
Cumulative credit (loss) at beginning of period
 
$
(3,074,728
)
 
$
(3,803,650
)
 
 
 
 
 
Additions:
 
 

 
 

Initial (increase) in credit reserves
 

 

Subsequent (increase) in credit reserves
 

 
(374,124
)
Initial additional other-than-temporary credit impairment losses
 

 

Subsequent additional other-than-temporary credit impairment losses
 

 
(183,790
)
 
 
 
 
 
Reductions:
 
 

 
 

For securities sold decrease in credit reserves
 

 
354,334

For securities sold decrease in other-than-temporary impairment
 

 

 
 
 
 
 
Cumulative credit (loss) at end of period
 
$
(3,074,728
)
 
$
(4,007,230
)

 
 
Nine Months Ended September 30,
 
 
2017
 
2016
Cumulative credit (loss) at beginning of period
 
$
(3,074,728
)
 
$
(3,636,432
)
 
 
 
 
 
Additions:
 
 

 
 
Initial (increase) in credit reserves
 

 

Subsequent (increase) in credit reserves
 

 
(541,342
)
Initial additional other-than-temporary credit impairment losses
 

 

Subsequent additional other-than-temporary credit impairment losses
 

 
(183,790
)
 
 
 
 
 
Reductions:
 
 

 
 

For securities sold decrease in credit reserves
 

 
354,334

For securities sold decrease in other-than-temporary impairment
 

 

 
 
 
 
 
Cumulative credit (loss) at end of period
 
$
(3,074,728
)
 
$
(4,007,230
)


19




FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (unaudited)
NOTE 4 - AVAILABLE-FOR-SALE SECURITIES (Continued)

The following table presents the components comprising the carrying value of AFS securities not deemed to be other than temporarily impaired by length of time the securities had an unrealized loss position as of September 30, 2017 and December 31, 2016. At September 30, 2017, the Company held 58 AFS securities, of which 41 were in an unrealized loss position for less than twelve consecutive months and five were in an unrealized loss for more than twelve months. At December 31, 2016, the Company held 46 AFS securities, of which 31 were in an unrealized loss position for less than twelve consecutive months and five were in an unrealized loss position for more than twelve months:
 
 
Less than 12 months
 
Greater than 12 months
 
Total
 
 
Estimated Fair
Value
 
Gross Unrealized
Losses
 
Estimated Fair
Value
 
Gross Unrealized
Losses
 
Estimated Fair
Value
 
Gross Unrealized
Losses
September 30, 2017
 
$
936,982,575

 
$
(4,278,357
)
 
$
65,049,336

 
$
(915,332
)
 
$
1,002,031,911

 
$
(5,193,689
)
December 31, 2016
 
$
619,414,077

 
$
(8,129,704
)
 
$
45,879,433

 
$
(2,110,684
)
 
$
665,293,510

 
$
(10,240,388
)

To the extent the Company determines there are likely to be decreases in cash flows expected to be collected, and as a result of non-credit impairment, such changes are generally recognized prospectively through adjustment of the security’s yield over its remaining life.
The following table presents a summary of the Company’s net realized gain (loss) from the sale of AFS securities for the three and nine months ended September 30, 2017 and September 30, 2016:
 
 
Three Months Ended
September 30, 2017
 
Three Months Ended
September 30, 2016
AFS securities sold, at cost
 
$
421,186,153

 
$
41,467,395

AFS principal payments, at cost
 

 
32,736,219

Proceeds from AFS securities sold
 
$
416,037,708

 
$
41,283,816

Proceeds from AFS principal payments
 

 
32,170,194

Net realized gain (loss) on sale of AFS securities
 
$
(5,148,445
)
 
$
(749,604
)

 
 
Nine Months Ended September 30, 2017
 
Nine Months Ended September 30, 2016
AFS securities sold, at cost
 
$
483,621,259

 
$
233,054,347

AFS principal payments, at cost
 

 
66,872,340

Proceeds from AFS securities sold
 
$
469,004,262

 
$
230,557,238

Proceeds from AFS principal payments
 

 
66,007,840

Net realized gain (loss) on sale of AFS securities
 
$
(14,616,997
)
 
$
(3,361,609
)


The following tables present the fair value of AFS investment securities by rate type as of September 30, 2017 and December 31, 2016:
 
 
September 30, 2017
 
 
Agency
 
Non-Agency
 
Multi-Family
 
Total
Adjustable rate
 
$
1,272,865,817

 
$

 
$

 
$
1,272,865,817

Fixed rate
 
869,804

 

 
30,750,419

 
31,620,223

Total
 
$
1,273,735,621

 
$

 
$
30,750,419

 
$
1,304,486,040


 
 
December 31, 2016
 
 
Agency
 
Non-Agency
 
Multi- Family
 
Total
Adjustable rate
 
$
788,727,476

 
$
7,592,802

 
$

 
$
796,320,278

Fixed rate
 
1,462,757

 

 
73,146,566

 
74,609,323

Total
 
$
790,190,233

 
$
7,592,802

 
$
73,146,566

 
$
870,929,601


20




FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (unaudited)
NOTE 4 - AVAILABLE-FOR-SALE SECURITIES (Continued)


The following tables present the fair value of AFS investment securities by maturity date as of September 30, 2017 and December 31, 2016:
 
 
September 30, 2017
 
December 31, 2016
Greater than or equal to one year and less than five years
 
$
1,217,555,664

 
$
399,872,894

Greater than or equal to five years
 
86,930,376

 
471,056,707

Total
 
$
1,304,486,040

 
$
870,929,601


As described in Note 2, when the Company purchases a credit-sensitive AFS security at a significant discount to its face value, the Company generally does not amortize into income a significant portion of this discount that the Company is entitled to earn because it does not expect to collect it due to the inherent credit risk of the security. The Company may also record an OTTI for a portion of its investment in the security to the extent the Company believes that the amortized cost will exceed the present value of expected future cash flows. The amount of principal that the Company does not amortize into income is designated as an off balance sheet credit reserve on the security, with unamortized net discounts or premiums amortized into income over time to the extent realizable.

Actual maturities of AFS securities are affected by the contractual lives of the associated mortgage collateral, periodic payments of principal, and prepayments of principal. Therefore actual maturities of available-for-sale securities are generally shorter than stated contractual maturities. Stated contractual maturities are generally greater than ten years.

The following tables present the changes for the nine months ended September 30, 2017 and the year ended December 31, 2016 of the unamortized net discount and designated credit reserves on the Company’s MBS:
 
 
September 30, 2017
 
 
Designated
credit reserve
 
Unamortized
net discount
 
Total
Beginning Balance as of January 1, 2017
 
$
(1,929,833
)
 
$
(27,841,262
)
 
$
(29,771,095
)
Acquisitions
 

 

 

Dispositions
 
1,929,833

 
16,982,632

 
18,912,465

Accretion of net discount
 

 
2,583,934

 
2,583,934

Realized gain on paydowns
 

 

 

Realized credit losses
 

 

 

Addition to credit reserves
 

 

 

Release of credit reserves
 

 

 

Ending Balance at September 30, 2017
 
$

 
$
(8,274,696
)
 
$
(8,274,696
)

 
 
December 31, 2016
 
 
Designated
credit reserve
 
Unamortized
net discount
 
Total
Beginning Balance as of January 1, 2016
 
$
(8,891,565
)
 
$
(57,280,275
)
 
$
(66,171,840
)
Acquisitions
 

 

 

Dispositions
 
4,893,913

 
21,637,637

 
26,531,550

Accretion of net discount
 

 
6,703,365

 
6,703,365

Realized gain on paydowns
 

 
325,709

 
325,709

Realized credit losses
 
3,023,911

 
(183,790
)
 
2,840,121

Addition to credit reserves
 
(1,021,433
)
 
1,021,433

 

Release of credit reserves
 
65,341

 
(65,341
)
 

Ending Balance at December 31, 2016
 
$
(1,929,833
)
 
$
(27,841,262
)
 
$
(29,771,095
)

Gains and losses from the sale of AFS securities are recorded within realized gain (loss) on sale of investments, net in the Company's condensed consolidated statements of operations.

Unrealized gains and losses on the Company’s AFS securities are recorded as unrealized gain (loss) on available-for-sale securities, net in the Company's condensed consolidated statement of comprehensive income (loss). For the nine months ended September 30, 2017, the Company had unrealized gains (losses) on AFS securities of $(2,954,193).

21




FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (unaudited)
NOTE 4 - AVAILABLE-FOR-SALE SECURITIES (Continued)


The following tables present components of interest income on the Company’s AFS securities for the three and nine months ended September 30, 2017 and September 30, 2016:
 
 
Three Months Ended September 30, 2017
 
Three Months Ended September 30, 2016
 
 
Coupon
interest
 
Net (premium
amortization)/
discount accretion
 
Interest
income
 
Coupon
interest
 
Net (premium
amortization)/
discount accretion
 
Interest
income
Agency
 
$
7,870,458

 
$
(514,600
)
 
$
7,355,858

 
$
4,006,740

 
$
118,440

 
$
4,125,180

Non-Agency
 

 

 

 
581,097

 
359,052

 
940,149

Multi-Family
 

 
471,423

 
471,423

 
239,213

 
1,245,327

 
1,484,540

Total
 
$
7,870,458

 
$
(43,177
)
 
$
7,827,281

 
$
4,827,050

 
$
1,722,819

 
$
6,549,869

 
 
Nine Months Ended September 30, 2017
 
Nine Months Ended September 30, 2016
 
 
Coupon
interest
 
Net (premium
amortization)/
discount accretion
 
Interest
income
 
Coupon
interest
 
Net (premium
amortization)/
discount accretion
 
Interest
income
Agency
 
$
19,613,173

 
$
(263,230
)
 
$
19,349,943

 
$
8,629,039

 
$
222,570

 
$
8,851,609

Non-Agency
 
42,254

 
9,946

 
52,200

 
2,139,698

 
1,235,030

 
3,374,728

Multi-Family
 

 
1,906,439

 
1,906,439

 
754,522

 
3,799,842

 
4,554,364

Total
 
$
19,655,427

 
$
1,653,155

 
$
21,308,582

 
$
11,523,259

 
$
5,257,442

 
$
16,780,701



NOTE 5 – MORTGAGE LOANS HELD-FOR-SALE, at FAIR VALUE

Mortgage loans held-for-sale consists of residential mortgage loans carried at fair value as a result of the fair value option. The following table presents the carrying value of the Company’s mortgage loans held-for-sale as of September 30, 2017 and December 31, 2016:
 
 
September 30, 2017
 
December 31, 2016
Amortized cost
 
$
495,486

 
$
2,867,263

Fair value adjustment
 

 
(17,727
)
Carrying value
 
$
495,486

 
$
2,849,536


The geographic concentrations of credit risk exceeding 5% of the total loan balances related to the mortgage loans held-for-sale as of September 30, 2017 and December 31, 2016 are as follows:
 
 
September 30, 2017
 
December 31, 2016
Texas
 
100.0
%
 
56.0
%
Kentucky
 
%
 
24.4
%
North Carolina
 
%
 
19.6
%

NOTE 6 – THE FREMF TRUSTS

The Company has elected the fair value option on the assets and liabilities of the FREMF 2011-K13 Trust and the FREMF 2012-KF01 Trust, which requires that changes in valuations of the trusts be reflected in the Company’s statements of operations. The Company’s net investment in the trusts is limited to the Multi-Family MBS comprised of first loss PO securities and IO securities acquired by the Company in 2014 with an aggregate net carrying value of $21,139,299 at September 30, 2017 and $18,342,040 at December 31, 2016.


22




FIVE OAKS INVESTMENT CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2017 (unaudited)

NOTE 6 – THE FREMF TRUSTS (Continued)

The condensed consolidated balance sheets of the FREMF trusts at September 30, 2017 and December 31, 2016 are set out below:
Balance Sheets
 
September 30, 2017