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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
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 
Logo.jpg
LUMENT FINANCE TRUST, INC.
(Exact name of registrant as specified in its charter)
Maryland45-4966519
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification Number)
230 Park Avenue, 20th Floor, New York, New York
10169
(Address of principal executive offices)(Zip code)

Registrant's Telephone Number, including area code (212) 317-5700
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class:Trading Symbol(s)Name of Exchange on Which Registered:
Common Stock, par value $0.01 per shareLFTNew York Stock Exchange
7.875% Series A Cumulative Redeemable Preferred Stock, par value $0.01 per shareLFTPrANew York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the 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
Non-accelerated Filer x
Smaller reporting company
Emerging growth company

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 x
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 May 8, 2024
Common stock, $0.01 par value 52,257,315




LUMENT FINANCE TRUST, INC.
 
TABLE OF CONTENTS
 
PART I - Financial Information
 
   
Item 1. 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
   
   
Item 1.
Item 1A.
Risk Factors
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
   
 





PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
 
March 31, 2024(1)
December 31, 2023(1)
 (unaudited) 
ASSETS  
Cash and cash equivalents$64,573,372 $51,247,063 
Restricted cash72,182 270,129 
Commercial mortgage loans held-for-investment, at amortized cost1,293,295,378 1,389,940,203 
Less: Allowance for credit losses(7,816,462)(6,059,006)
Commercial mortgage loans held-for-investment, net of allowance for credit losses1,285,478,916 1,383,881,197 
Mortgage servicing rights, at fair value696,600 691,973 
Accrued interest receivable8,463,278 8,588,805 
Investment related receivable 17,320,000  
Other assets1,587,577 2,253,280 
Total assets$1,378,191,925 $1,446,932,447 
LIABILITIES AND EQUITY  
LIABILITIES  
Collateralized loan obligations and secured financings, net1,075,890,203 1,146,210,752 
Secured term loan, net47,282,352 47,220,226 
Accrued interest payable3,850,616 4,092,701 
Dividends payable4,659,261 4,654,904 
Fees and expenses payable to Manager3,072,500 1,587,875 
Other liabilities(2)
501,691 2,373,609 
Total liabilities1,135,256,623 1,206,140,067 
COMMITMENTS AND CONTINGENCIES (NOTES 10 & 11)
EQUITY  
Preferred Stock: par value $0.01 per share; 50,000,000 shares authorized; 7.875% Series A Cumulative Redeemable, $60,000,000 aggregate liquidation preference, 2,400,000 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively
57,254,935 57,254,935 
Common Stock: par value $0.01 per share; 450,000,000 shares authorized,52,257,315 and 52,248,631 shares issued and outstanding, at March 31, 2024 and December 31, 2023, respectively
522,574 522,487 
Additional paid-in capital314,592,963 314,587,299 
Cumulative distributions to stockholders(183,888,760)(179,045,749)
Accumulated earnings54,354,090 47,373,908 
Total stockholders' equity242,835,802 240,692,880 
Noncontrolling interests$99,500 $99,500 
Total equity$242,935,302 $240,792,380 
Total liabilities and equity$1,378,191,925 $1,446,932,447 

(1)     Our consolidated balance sheets include assets and liabilities of consolidated variable interest entities ("VIEs") as the Company was the primary beneficiary of these VIEs. As of March 31, 2024 and December 31, 2023, assets of consolidated VIEs totaled $1,311,421,901 and $1,384,136,334, respectively and the liabilities of consolidated VIEs totaled $1,079,644,656 and $1,150,207,290 respectively. See Note 4 for further discussion.

(2)     Includes $63,064 and $43,647 of Current Expected Credit Loss ("CECL") allowance related to unfunded commitments on commercial mortgage loans, net as of March 31, 2024 and December 31, 2023, respectively.

The accompanying notes are an integral part of these unaudited consolidated financial statements.
1




LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)

Three Months Ended March 31, 2024Three Months Ended March 31, 2023
Revenues:  
Interest income:  
Commercial mortgage loans held-for-investment$34,790,118 $21,944,661 
Cash and cash equivalents651,403 261,665 
Interest expense:  
Collateralized loan obligations and secured financings(21,511,754)(13,033,046)
Secured term loan(937,210)(926,912)
Net interest income12,992,557 8,246,368 
Expenses:
Management and incentive fees2,568,207 1,087,262 
General and administrative expenses1,134,136 948,066 
Operating expenses reimbursable to Manager470,167 509,986 
Other operating expenses36,480 64,584 
Compensation expense58,750 62,108 
Total expenses4,267,740 2,672,006 
Other income and expense:  
(Provision for) reversal of credit losses, net(1,776,873)179,684 
Change in unrealized (loss) gain on mortgage servicing rights4,627 (49,129)
Servicing income, net38,503 51,528 
Total other income and expense(1,733,743)182,083 
Net income before provision for income taxes6,991,074 5,756,445 
(Provision for) benefit from income taxes(10,892)10,246 
Net income6,980,182 5,766,691 
Dividends accrued to preferred stockholders(1,184,999)(1,184,958)
Net income attributable to common stockholders$5,795,183 $4,581,733 
Earnings per share:
Net income attributable to common stockholders (basic and diluted)$5,795,183 $4,581,733 
Weighted average number of shares of common stock outstanding52,249,299 52,231,152 
Basic and diluted income per share$0.11 $0.09 
Dividends declared per share of common stock$0.07 $0.06 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
2




LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Equity
(unaudited)
 Preferred StockCommon StockAdditional
Paid-in
Capital
Cumulative
Distributions to
Stockholders
Accumulated Earnings Total Stockholders' EquityNoncontrolling interestsTotal
Equity
 SharesValueSharesPar Value
Balance at December 31, 20232,400,000 $57,254,935 52,248,631 $522,487 $314,587,299 $(179,045,749)$47,373,908 $240,692,880 $99,500 $240,792,380 
Issuance of common stock— — 8,684 87 19,860 — — $19,947 — $19,947 
Cost of issuing common stock— — — — (14,196)— — $(14,196)— $(14,196)
Restricted stock compensation expense— — — — — — — $— — $ 
Net income— — — — — — 6,980,182 $6,980,182 — $6,980,182 
Common stock dividends— — — — — (3,658,012)— $(3,658,012)— $(3,658,012)
Preferred stock dividends— — — — — (1,184,999)— (1,184,999)— $(1,184,999)
Balance at March 31, 20242,400,000 $57,254,935 52,257,315 $522,574 $314,592,963 $(183,888,760)$54,354,090 $242,835,802 $99,500 $242,935,302 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3




LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Equity
(unaudited)
Preferred StockCommon StockAdditional
Paid-in
Capital
Cumulative
Distributions to
Stockholders
Accumulated
Earnings
Total Stockholders' EquityNoncontrolling interestsTotal
Equity
SharesValueSharesValue
Balance at December 31, 20222,400,000 $57,254,935 52,231,152 $522,252 $314,598,384 $(160,724,426)$31,250,852 $242,901,997 $99,500 $243,001,497 
Cost of issuing common stock— — — — (14,040)— — (14,040)— (14,040)
Restricted stock compensation expense— — — — 3,358 — — 3,358 — 3,358 
Cumulative-effect adjustment upon adoption of ASU 2016-13— — — — — — (3,591,440)(3,591,440)— (3,591,440)
Net income— — — — — — 5,766,691 5,766,691 — 5,766,691 
Common stock dividends— — — — — (3,133,869)— (3,133,869)— (3,133,869)
Preferred stock dividends— — — — — (1,184,958)— (1,184,958)— (1,184,958)
Balance at March 31, 20232,400,000 $57,254,935 52,231,152 $522,252 $314,587,702 $(165,043,253)$33,426,103 $240,747,739 $99,500 $240,847,239 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
4




LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended
March 31, 2024
Three Months Ended
March 31, 2023
Cash flows from operating activities:  
Net income$6,980,182 $5,766,691 
Adjustments to reconcile net income to net cash provided by operating activities:  
Accretion of commercial mortgage loans held-for-investment discounts(711,236) 
Amortization of commercial mortgage loans held-for-investment premiums 5,287 
Accretion of deferred loan fees(57,323)(64,293)
Amortization of deferred offering costs(14,196)(14,040)
Amortization of deferred financing costs945,782 684,771 
Provision for credit losses, net1,757,456 (179,684)
Unrealized loss (gain) on mortgage servicing rights(4,627)49,129 
Restricted stock compensation expense 3,358 
Net change in:  
Accrued interest receivable125,527 (141,184)
Other assets665,703 (150,577)
Accrued interest payable(242,085)144,100 
Fees and expenses payable to Manager1,484,625 (2,333)
Other liabilities(1,871,916)(259,282)
Net cash provided by operating activities9,057,892 5,841,943 
Cash flows from investing activities:  
Purchase of commercial mortgage loans held-for-investment  
Principal payments from commercial mortgage loans held-for-investment80,093,383 51,625,741 
Net cash (used in) investing activities80,093,383 51,625,741 
Cash flows from financing activities:  
Proceeds from issuance of common stock19,947  
Payment of collateralized loan obligations(71,204,206) 
Dividends paid on common stock(3,657,404)(3,133,869)
Dividends paid on preferred stock(1,181,250)(1,181,250)
Net cash provided by financing activities(76,022,913)(4,315,119)
Net increase in cash, cash equivalents and restricted cash13,128,362 53,152,565 
Cash, cash equivalents and restricted cash, beginning of period51,517,192 47,366,365 
Cash, cash equivalents and restricted cash, end of period$64,645,554 $100,518,930 
Supplemental disclosure of cash flow information  
Cash paid for interest$21,745,268 $13,131,087 
Non-cash investing and financing activities information  
Dividends declared but not paid at end of period$4,659,261 $4,318,827 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
5



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2024
NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS

Lument Finance Trust, Inc. (together with its consolidated subsidiaries, the "Company"), is a Maryland corporation that focuses primarily on investing in, originating, financing and managing a portfolio of commercial real estate ("CRE") debt investments. The Company is externally managed by Lument Investment Management, LLC (the "Manager" or "Lument IM"). The Company's common stock is listed on the NYSE under the symbol "LFT."

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.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America ("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 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 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 for the year ended December 31, 2023, which was filed with the Securities and Exchange Commission ('SEC") on March 15, 2024.

Principles of Consolidation

The accompanying consolidated financial statements of the Company include the accounts of the Company and all subsidiaries which it controls (i) through voting or similar rights or (ii) by means other than voting rights if the Company is the primary beneficiary of a variable interest entity ("VIE"). All significant intercompany transactions have been eliminated on consolidation.

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.

VIEs

An entity is considered a VIE when any of the following applies: (1) the equity investors (if any) lack one or more essential characteristics of a controlling financial interest; (2) the equity investment at risk is not sufficient to finance that entity's activities without additional subordinated financial support; or (3) the equity investors have voting rights that are not proportionate to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest. The Company consolidates VIEs in which it is considered to be the primary beneficiary. The primary beneficiary is defined as the entity having both the following characteristics: (1) the power to direct activities that, when taken together, most significantly impact the VIE performance; and (2) the obligation to absorb losses and right to receive returns from the VIE that would be significant to the VIE.

The Company evaluates quarterly its junior retained notes and preferred shares of LFT CRE 2021-FL1, Ltd. and LFT CRE 2021-FL1, LLC (collectively, the "2021-FL1 CLO") and LMF 2023-1, LLC ("LMF 2023-1 Financing") for potential consolidation. At March 31, 2024, the Company determined it was the primary beneficiary of LFT CRE 2021-FL1 CLO and LMF 2023-1 Financing based on its power to direct the activities that most significantly impact the economic performance of LFT 2021-FL1 CLO and LMF 2023-1 Financing and its obligation to absorb losses derived from ownership of its junior retained notes and preferred shares. Accordingly, the Company consolidated the assets, liabilities, income and expenses of the underlying issuing entities.

Collateralized Loan Obligations and Secured Financings

CLOs and secured financings represent third-party liabilities of 2021-FL1 CLO and LMF 2023-1 Financing. The 2021-FL1 CLO and LMF 2023-1 Financing are VIEs and Management has determined that the Company is the primary beneficiary of the 2021-FL1 CLO and LMF 2023-1 Financing. Accordingly, the Company consolidates the assets, liabilities (other than the below investment grade-rated notes and preferred shares of the 2021-FL1 CLO and LMF 2023-1 Financing retained by the Company that are eliminated on consolidation), income and expense of the 2021-FL1 CLO and LMF 2023-1 Financing. The third-party obligations of the 2021-FL1 CLO and LMF 2023-1 Financing do not have any recourse to the Company as the consolidator of the CLO and secured financing issuing entities. The third-party obligations of the 2021-FL1 CLO and LMF 2023-1 Financing are carried at their outstanding unpaid principal balances, net of any deferred financing costs. Any premiums, discounts or deferred financing costs associated with these third-party obligations are amortized to interest expense using the effective interest method over the expected average life of the related obligations, or on a straight line basis when it approximates the effective interest method. The Company's maximum exposure to loss from collateralized loan obligations ("CLO") and secured financings was $234,850,000 and $166,250,000 at March 31, 2024 and December 31, 2023, respectively.

6



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2024
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In the second quarter of 2023, $1,684,618 in costs related to a previously contemplated public CRE CLO were expensed as "Other operating expenses" in the statement of operations as a result of abandoning the contemplated transaction due to the then current capital market environment.

Cash and Cash Equivalents and Restricted Cash

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

Restricted cash includes cash held within 2021-FL1 CLO as of March 31, 2024 and 2021-FL1 CLO and LMF 2023-1 Financing as of December 31, 2023, respectively.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the statement of cash flows:

March 31, 2024December 31, 2023
Cash and cash equivalents$64,573,372 $51,247,063 
Restricted cash 2021-FL1 CLO$72,182 $71,826 
Restricted cash LMF 2023-1 Financing$ $198,303 
Total cash, cash equivalents and restricted cash$64,645,554 $51,517,192 

Deferred Offering Costs

Direct costs incurred to issue shares classified as equity, such as legal and accounting fees, are 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 consolidated balance sheets in the line item "Other assets", 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 consolidated balance sheets.

Fair Value Measurements

The "Fair Value Measurements and Disclosures" Topic 820 of the FASB, or ASC 820, defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurement under GAAP. Specifically, the guidance defines fair value based on exit price, or the price that would be received upon the sale of an asset or the transfer of a liability in an orderly transaction between market participants at measurement date. ASC 820 specifies a hierarchy of valuation techniques based on the inputs used in measuring fair value.

Valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable market data from independent sources, while unobservable inputs reflect the Company's market assumptions. The three levels are defined as follows:

Level 1 InputsQuoted prices for identical instruments in active markets.
Level 2 Inputs – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Inputs – Instruments with primarily unobservable value drivers.

Pursuant to ASC 820 we disclose fair value information about financial instruments, which are not otherwise reported at fair value in our consolidated balance sheet, to the extent it is practicable to estimate fair value for those certain instruments.

The following methods and assumptions are used to estimate the fair value of each class of financial instrument, for which it is practicable to estimate that value:
Cash and cash equivalents: The carrying amount of cash and cash equivalents approximates fair value.
Restricted cash: The carrying amount of restricted cash approximates fair value.
Commercial mortgage loans: The Company determines the fair value of commercial mortgage loans by utilizing a pricing model based on discounted cash flow methodologies using discount rates, which reflect current market interest rates that would be offered for loans with similar characteristics and credit quality. Additionally, the Company may record fair value adjustments on a non-recurring basis when it has determined it necessary to record a specific impairment reserve or charge-off against a loan and the Company measures such specific reserve or charge-off using the fair value of the loan's collateral. To determine the fair value of loan collateral, the Company employs the income capitalization approach, appraised values, broker opinion of value, sale offers, letters of intention to purchase, or other valuation benchmarks, as applicable, depending upon the nature of such collateral and other relevant market factors.
Mortgage servicing rights ("MSRs"): The Company determines the fair value of MSRs from a third-party pricing service on a recurring basis. The third-party pricing service uses common market pricing methods that include using discounted cash flow models to calculate present value, estimated net servicing income and observed market pricing for MSR purchase and sale transactions. The model considers contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors.
Collateralized loan obligations and secured financings: The Company determines the fair value of collateralized loan obligations and secured financings by utilizing a third-party pricing service. In determining the value of a particular investment, pricing service providers may use market spreads, inventory levels, trade and bid history, as well as market insight from clients, trading desks and global research platform.
Secured term loan: The Company determines the fair value of its secured term loan based on a discounted cash flow methodology.

7



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2024
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Commercial Mortgage Loans Held-for-Investment

Commercial mortgage loans held-for-investment represent floating-rate transitional loans and other commercial mortgage loans purchased or originated by the Company. These loans include loans sold into securitizations that the Company consolidates. Commercial mortgage loans held-for-investment are intended to be held-to-maturity and, accordingly, are carried at their unpaid principal balances, adjusted for net unamortized loan fees and costs (in respect of originated loans), premiums and discounts (in respect of purchased loans) and impairment, if any.

Interest income is recognized as revenue using the effective interest method and is recorded on the accrual basis according to the terms of the underlying loan agreement. Any fees, costs, premiums and discounts associated with these loan investments are deferred and amortized over the term of the loan on a straight-line basis approximating the effective interest method. Income accrual is generally suspended and loans are placed on non-accrual status on the earlier of the date at which payment has become 90 days past due or when full and timely collection of interest and principal is considered not probable. The Company may return a loan to accrual status when repayment of principal and interest is reasonably assured under the terms of the underlying loan agreement.

As of March 31, 2024, the Company held two loans, collateralized by a multifamily properties, with unpaid principal balance of $37.5 million on non-accrual status with interest collections accounted for on the cash basis method. See Note 3 for further discussion.

On January 1, 2023, the Company adopted Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") and amendments, which replaces the incurred loss methodology with an expected loss model known as the Current Expected Credit Loss ("CECL") model. CECL amends the previous credit loss model to reflect a reporting entity's current estimate of all expected credit losses, not only based on historical experience and current economic conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information. The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, and off-balance credit exposures such as unfunded loan commitments. The allowance for credit losses required under ASC 2016-13 is included in "Allowance for credit losses" on our consolidated balance sheets. The allowance for credit losses attributed to unfunded loan commitments is included in "Other liabilities" in the consolidated balance sheets. The change to the allowance for credit loss recorded on January 1, 2023 is reflected as a direct charge to retained earnings on our consolidated statements of changes in equity; however subsequent changes to the allowance for credit losses are recognized through net income on our consolidated statements of operations. In connection with the adoption of ASU 2016-13, we recorded a $3.6 million decrease to accumulated earnings as of January 1, 2023.

The Company's implementation process included a selection of a credit loss analytical model, completion and documentation of policies and procedures, changes to internal reporting processes and related internal controls and additional disclosures. A control framework for governance, data, forecast and model controls was developed to support the allowance for credit losses process. Determining an allowance for credit loss estimate requires significant judgment and a variety of subjective assumptions, including (i) determination of relevant historical loan loss data sets, (ii) the current credit quality of loans and operating performance of loan collateral and the Company's expectations of performance and (iii) expectation of macroeconomic forecasts over the relevant time period.

The Company estimates the allowance for credit losses for its portfolio on a collective basis, including unfunded loan commitments, for loans that share similar risk characteristics. The calculation is applied at the loan level. The allowance for credit losses estimation methodology used by LFT includes a probability of default and loss given default method utilizing a widely-used third-party analytical model with historical loan losses for over 125,000 commercial real estate loans dating back to 1998. Within this data set, we focused our historical loss information on the most relevant subset of available CRE data, which we determined based on loan metrics that are most comparable to our loan portfolio including asset type, spread to interest rate, unpaid principal balance and origination loan-to-value, or LTV. The Company expects to use this proxy data set, or variants of it, unless the Company develops its own sufficient history of realized losses. The Company determined the key variables driving its allowance for credit losses estimate are debt service coverage ratio and LTV ratio. Other notable variables include property type, property location and loan vintage. The Company determines its allowance for credit loss estimate based on the weighting of multiple macroeconomic forecast scenarios driven by macroeconomic variables such as gross domestic product ("GDP"), unemployment rate, federal funds target rate and core personal consumption expenditure ("CPR") among others, during the reasonable and supportable forecast period. The reasonable and supportable forecast period is currently one year, however, the Company regularly evaluates the reasonable and supportable forecast period to determine if a change is needed based on our assessment of the most likely scenario of assumptions and plausible outcomes for the U.S. economy. For the period beyond which the Company is able to make reasonable and supportable forecasts, the Company reverts, on a straight-line basis over four quarters, to the historical loss information derived from CRE data set.

Any loans considered to be a Default Risk or otherwise deemed to be collateral dependent will be individually evaluated for a specific allowance for credit losses. A loan is considered collateral dependent when the Company determines that the facts and circumstances of the loan deem the debtor to be experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. If a loan is considered to be collateral dependent, a specific allowance for credit losses is recorded to reduce the carrying value of the loan through a charge to the provision for (reversal of) credit losses. The specific allowance for credit losses is measured by comparing the estimated fair value of the underlying collateral, less costs to sell, to the amortized cost of the respective loan. These valuations require significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, actions of other lenders, and other factors deemed necessary by the Manager. Actual losses, if any, could ultimately differ from estimated losses.

Prior to the adoption of ASU 2016-13, the Company established an allowance for credit loss under the incurred loss model which required analysis of Default Risk loans and those determined to be collateral dependent in a manner consistent with the specific allowance described above. In addition, the Company evaluated the entire loan portfolio to determine whether the portfolio had any impairment that required a valuation allowance on the remainder of the portfolio.

8



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2024
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Pre-adoptionTransition adjustmentPost-adoption
Assets
Commercial mortgage loans, held-for-investment$1,076,148,186 $ $1,076,148,186 
Less: Allowance for credit losses(4,258,668)(3,549,501)(7,808,169)
Commercial mortgage loans, held-for-investment, net of allowance for credit losses$1,071,889,518 $(3,549,501)$1,068,340,017 
Liabilities
Other liabilities(1)
$583,989 $41,939 $625,928 
Equity
Accumulated earnings$31,250,852 $(3,591,440)$27,659,412 
(1) Includes reserve for unfunded loan commitments

Quarterly, the Company assesses the risk factors of each loan classified as held-for-investment and assigns a risk rating based on a variety of factors, including, without limitation, debt-service coverage ratio ("DSCR"), loan-to-value ratio ("LTV"), property type, geographic and local market dynamics, physical condition, leasing and tenant profile, adherence to business plan and exit plan, maturity default risk and project sponsorship. The Company's loans are rated on a 5-point scale, from least risk to greatest risk, respectively, which ratings are described as follows:

1.Very Low Risk: exceeds expectations and is outperforming underwriting or it is very likely that the underlying loan can be refinanced easily in the period's prevailing capital market conditions
2.Low Risk: meeting or exceeding underwritten expectations
3.Moderate Risk: consistent with underwritten expectations or the sponsor may be in the early stages of executing the business plan and the loan structure appropriately mitigates additional risks
4.High Risk: potential risk of default, a loss may occur in the event of default
5.Default Risk: imminent risk of default, a loss is likely in the event of default

Mortgage Servicing Rights, at Fair Value

Mortgage servicing rights ("MSRs") are associated with residential mortgage loans that the Company historically purchased and subsequently sold or securitized. MSRs are held and managed at Five Oaks Acquisition Corp. ("FOAC"), the Company's taxable REIT subsidiary ("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 subservicer, the associated loan. MSRs are reported at fair value. Residential mortgage loans for which the Company owns the MSRs are directly serviced by two sub-servicers retained by the Company. The Company does not directly service any residential mortgage loans.
 
MSR income is recognized at the contractually agreed upon 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.

Secured Term Loan

The Company and certain of its subsidiaries are party to a $47.75 million credit and guaranty agreement with the lenders referred to therein and Cortland Capital Service LLC, as administrative agent and collateral agent for the lenders (the "Secured Term Loan"). The Secured Term Loan is carried at its unpaid principal balance, net of deferred financing costs. Deferred financing costs associated with this liability are amortized to interest expense on a straight line basis when it approximates the effective interest method. See Note 6 for additional information related to the Secured Term Loan.

Common Stock

At March 31, 2024 and December 31, 2023, the Company was authorized to issue up to 450,000,000 shares of common stock, par value $0.01 per share. The Company had 52,257,315 and 52,248,631 shares of common stock issued and outstanding at March 31, 2024 and December 31, 2023, respectively.

Stock Repurchase Program

On December 15, 2015, the Company's Board of Directors (the "Board") 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.

Preferred Stock

At March 31, 2024 and December 31, 2023, the Company was authorized to issue up to 50,000,000 shares 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 Board. On May 5, 2021, the Company issued 2,400,000 shares of 7.875% Series A Cumulative Redeemable Preferred Stock (Series A Preferred Stock"). The Company had 2,400,000 shares of preferred stock issued and outstanding at March 31, 2024 and December 31, 2023, respectively. Our preferred stock is classified as permanent equity and carried at its liquidation preference less offering costs. See Note 12 for additional information related to our Series A Preferred Stock.
9



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2024
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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. A REIT is generally taxable as a U.S. C-Corporation; however, so long as the Company qualifies as a REIT it is entitled to a special deduction for dividends paid to stockholders not otherwise available to corporations. Accordingly, the Company generally will not be subject to U.S. federal income tax to the extent its distributions to stockholders equals, or exceeds, its REIT taxable income for the year. In addition, the Company must continue to meet certain REIT qualification requirements with respect to distributions, as well as certain asset, income and share ownership tests, in accordance with Sections 856 through 860 of the Code, as summarized below. In addition, the TRS is maintained to perform certain services and earn income for the Company that the Company is not permitted to engage in as a REIT.

To maintain its qualification as a REIT, the Company must meet certain requirements, including but not limited to the following: (i) distribute at least 90% of its REIT taxable income to its stockholders; (ii) invest at least 75% of its assets in REIT qualifying assets, with additional restrictions with respect to asset concentration risk; and (iii) earn at least 95% of its gross income from qualifying sources of income, including at least 75% from qualifying real estate and real estate related sources. Regardless of the REIT election, 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 as a U.S. C-Corporation, which could have a material adverse impact on its results of operations and amounts available for distributions to its stockholders.

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.
 
The TRS is not subject to a distribution requirement with respect to its REIT owner. The TRS may retain earnings annually, resulting in an increase in the consolidated book equity of the Company and without a corresponding distribution requirement by the REIT. If the TRS generates net income, and declares dividends to the Company, such dividends will be included in its taxable income and necessitate a distribution to its stockholders in accordance with the REIT distribution requirements.

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.

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 considers 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 13 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 consolidated financial statements. The Company accounts for share-based compensation using the fair-value based methodology prescribed by ASC 718, Share-Based Payment ("ASC 718"). Compensation cost related to restricted common stock issued to the Company's independent directors is measured at its estimated fair value at the grant date and amortized and expensed over the vesting period. See Note 9 for details of stock-based awards issuable under the Company's prior equity incentive plan, which expired on December 18, 2022 and is no longer being used to issue new equity awards.

Comprehensive Income (Loss) Attributable to Common Stockholders

For the three months ended March 31, 2024 and 2023, comprehensive income equaled net income; therefore, a separate consolidated statement of comprehensive income is not included in the accompanying consolidated financial statements.

Recently Issued and/or Adopted Accounting Standards

Segment Reporting

In November 2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures." ASU 2023-07 intends to improve reportable segment disclosure requirements, enhance interim disclosure requirements and provides for new segment disclosure requirements for entities with a single reportable segment. This standard is effective for fiscal years beginning after December 15, 2023 and interim periods periods within fiscal years beginning after December 15, 2024. ASU 2023-07 is to be adopted retrospectively to all prior periods presented. The Company is currently evaluating the impact of the update on the Company's consolidated financial statements and does not expect the adoption of ASU 2023-07 to have a material impact on our consolidated financial statements.

Income Taxes

In December 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures." ASU 2023-09 improves the transparency of income tax disclosures related to rate reconciliation and income taxes. ASU 2023-09 is effective for annual periods beginning after December 15, 2024. For entities other than public business entities, the amendments are effective for annual periods beginning after December 15, 2025. Early adoption is
10



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2024
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments should be applied prospectively, however retrospective application is permitted. The Company is currently evaluating the impact of the update on the Company's consolidated financial statements.

NOTE 3 COMMERCIAL MORTGAGE LOANS HELD-FOR-INVESTMENT

The following tables summarize certain characteristics of the Company's investments in commercial mortgage loans as of March 31, 2024 and December 31, 2023:
Weighted Average
Loan TypeUnpaid Principal Balance
Carrying Value(1)
Loan CountFloating Rate Loan %
Coupon(2)
Term
 (Years)(3)
March 31, 2024
Loans held-for-investment
Senior secured loans(4)
$1,299,971,777 $1,293,295,378 81 100.0 %8.9 %2.7
Allowance for credit lossesN/A(7,816,462)
1,299,971,777 1,285,478,916 81 100.0 %8.9 %2.7

Weighted Average
Loan TypeUnpaid Principal Balance
Carrying Value(1)
Loan CountFloating Rate Loan %
Coupon(2)
Term
 (Years)(3)
December 31, 2023
Loans held-for-investment
Senior secured loans(4)
$1,397,385,160 $1,389,940,203 88 100.0 %8.9 %2.9
Allowance for credit lossesNA(6,059,006)
1,397,385,160 1,383,881,197 88 100.0 %8.9 %2.9

(1)    Carrying Value includes $6,289,627 and $7,000,863 in unamortized purchase discounts as of March 31, 2024 and December 31, 2023, respectively.
(2)    Weighted average coupon assumes applicable 30-day Term Secured Overnight Financing Rate ("SOFR") of 5.32% and 5.33% as of March 31, 2024 and December 31, 2023, respectively, inclusive of weighted average interest rate floors of 0.40% and 0.38%, respectively. As of March 31, 2024 and December 31, 2023, 100.0% of the investments by total investment exposure earned a floating rate indexed to 30-day Term SOFR.
(3)    Weighted average remaining term assumes all extension options are exercised by the borrower, provided, however, that our loans may be repaid prior to such date.
(4)    As of March 31, 2024, all of the outstanding senior secured loans were held in VIEs. As of December 31, 2023, $1,375,277,312 of the outstanding senior secured loans were held in VIEs and $8,603,886 of the outstanding senior secured loans were held outside VIEs.

Activity: For the three months ended March 31, 2024, the loan portfolio activity was as follows:

Commercial Mortgage Loans Held-for-Investment
Balance at December 31, 2023$1,383,881,197 
Purchases, advances and originations 
Principal payments(97,413,384)
Accretion of purchase discount711,236 
Amortization of purchase premium 
Accretion of deferred loan fees57,323 
Provision for credit losses(1,757,456)
Balance at March 31, 2024
$1,285,478,916 

Loan Risk Ratings: As further described in Note 2, the Company evaluates the commercial mortgage loan portfolio on a quarterly basis and assigns a risk rating based on a variety of factors. The following table presents the principal balance and net book value of the loan portfolio based on the Company's internal risk ratings as of March 31, 2024 and December 31, 2023:

March 31, 2024
Amortized Cost by Year of Origination
Risk RatingNumber of LoansOutstanding Principal2023202220212019
1 $ $ $ $ $ 
24 47,149,206  46,499,455   
11



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2024
NOTE 3 - COMMERCIAL MORTGAGE LOANS HELD-FOR-INVESTMENT (Continued)
360 951,019,507 17,975,568 386,076,177 504,114,987 33,089,424 
415 264,289,692  152,211,140 108,292,222  
52 37,513,372  37,219,943   
81 $1,299,971,777 $17,975,568 $622,006,715 $612,407,209 $33,089,424 

December 31, 2023
Amortized Cost by Year of Origination
Risk RatingNumber of LoansOutstanding Principal2023202220212019
1 $ $ $ $ $ 
23 37,720,000  37,276,159   
367 1,019,844,272 17,887,019 449,921,414 542,010,684  
416 294,150,124  134,664,646 156,450,510  
52 45,670,764   8,889,177 36,781,588 
88 $1,397,385,160 $17,887,019 $621,862,219 $707,350,371 $36,781,588 

As of March 31, 2024, the average risk rating of the commercial mortgage loan portfolio was 3.5 (Moderate Risk), weighted by investment carrying value, with 76.9% of the net carrying value of commercial loans held-for-investment rated 3 (Moderate Risk) or better by the Company's Manager.

As of December 31, 2023, the average risk rating of the commercial mortgage loan portfolio was 3.5 (Moderate Risk), weighted by investment carrying value, with 75.7% of the net carrying value of commercial loans held-for-investment rated 3 (Moderate Risk) or better by the Company's Manager.

The average risk rating of the portfolio remained consistent during the three months ended March 31, 2024. The change to underlying risk rating consisted of loans that paid off with a risk rating of "3" of $85.0 million and a risk rating of "5" of $12.4 million during the three months ended March 31, 2024. Additionally, $9.4 million of loans with a risk rating of "3" transitioned to a risk rating of "2," $71.0 million of loans with a risk rating of "3" transitioned to a risk rating of "4", $17.3 million of loans with a risk rating of "3" transitioned to a risk rating of "5", $80.7 million of loans with a risk rating of "4" transitioned to a risk rating of "3", $20.3 million of loans with a risk rating of "4" transitioned to a risk rating of "5" and $33.2 million of loans with a risk rating of "5" transitioned to a risk rating of "4".

Concentration of Credit Risk: The following tables present the geographic and property types of collateral underlying the Company's commercial mortgage loans as a percentage of the loans' carrying value as of March 31, 2024 and December 31, 2023:

Loans Held-for-Investment
March 31, 2024December 31, 2023
Geography
South43.2 %43.5 %
Southwest31.6 29.4 
Mid-Atlantic13.4 15.0 
Midwest7.3 7.9 
West4.5 4.2 
Total100.0 %100.0 %
March 31, 2024
December 31, 2023
Collateral Property Type
Multifamily93.6 %94.0 %
Seniors Housing and Healthcare5.8 5.5 
Self-Storage0.6 0.5 
Total100.0 %100.0 %

Allowance for Credit Losses:

The following table presents the changes for the three months ended March 31, 2024 and March 31, 2023 in the provision for credit losses on loans held-for-investment:

12



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2024
NOTE 3 - COMMERCIAL MORTGAGE LOANS HELD-FOR-INVESTMENT (Continued)
Three months ended
March 31, 2024March 31, 2023
Allowance for credit losses at beginning of period$6,059,006 $4,258,668 
Cumulative-effect adjustment upon adoption of ASU 2016-13 3,549,501 
Provision for (reversal of) credit losses1,757,456 (178,970)
Charge offs (4,271,672)
Allowance for credit losses at end of period$7,816,462 $3,357,527 

The following table presents the changes for the three months ended March 31, 2024 and March 31, 2023 in the provision for (release of) credit losses on the unfunded commitments of the Company's loans held-for-investment:
Three months ended
March 31, 2024March 31, 2023
Allowance for credit losses at beginning of period$43,647 $ 
Cumulative-effect adjustment upon adoption of ASU 2016-13 41,939 
Provision for (reversal of) credit losses19,417 (714)
Charge offs  
Allowance for credit losses at end of period$63,064 $41,225 

The following tables present the allowance for credit losses held-for-investment:

March 31, 2024
General ReserveSpecific ReserveTotal Reserve
Allowance for credit losses:
Loans held for investment$7,816,462 $ $7,816,462 
Unfunded loan commitments63,064  63,064 
Total allowance for credit losses$7,879,526 $ $7,879,526 
Total unpaid principal balance$1,299,971,777 $ $1,299,971,777 

December 31, 2023
General ReserveSpecific ReserveTotal Reserve
Allowance for credit losses:
Loans held for investment$6,059,006 $ $6,059,006 
Unfunded loan commitments43,647  43,647 
Total allowance for credit losses$6,102,653 $ $6,102,653 
Total unpaid principal balance$1,397,385,160 $ $1,397,385,160 

During the three months ended March 31, 2024, the Company recorded an increase of $1.8 million in the allowance for credit losses, bringing the total allowance for credit loss to $7.8 million as of March 31, 2024. For the three months ended March 31, 2024, the Company's estimate of expected credit losses increased primarily due to changes in macroeconomic assumptions employed in determining the Company's model-based general reserve which reflects softening in CRE prices compared to the prior quarter.

We did not have any impaired loans, non-accrual loans, or loans in maturity default other than the loans discussed below as of March 31, 2024 or December 31, 2023.

During the period ended March 31, 2024, management identified one loan, collateralized by a multifamily property in Brooklyn, NY, with an unpaid principal value of $17.3 million as requiring individual evaluation for a specific allowance for credit losses due to expected imminent maturity default, and a resulting risk rating of "5"; however no specific allowance for credit losses were required after analysis of the underlying collateral value. This loan is on non-accrual status as a result of the expected imminent maturity default, with interest recorded as income on a cash basis.

During the period ended March 31, 2024, management identified one loan, collateralized by two multifamily properties near Augusta, GA, with an unpaid aggregate principal value of $20.3 million as requiring individual evaluation for a specific allowance for credit losses due to monetary default, and a resulting risk rating of "5"; however no specific allowance for credit losses were required after analysis of the underlying collateral value. This loan is on non-accrual status as a result of monetary default, with interest recognized as income on a cash basis.

In February 2023, in connection with the sale of the office building collateralizing an impaired loan by the borrower to an unaffiliated third-party, the Company accepted a discounted payoff of approximately $6.0 million on the impaired loan, which had an unpaid principal balance of $10.3 million. A specific
13



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2024
NOTE 3 - COMMERCIAL MORTGAGE LOANS HELD-FOR-INVESTMENT (Continued)
allowance for credit loss of $4.3 million was recorded for this impaired loan in the year ended December 31, 2022. Upon the discounted payoff, a $4.3 million charge off against the allowance for credit losses was recorded, with de minimis impact to income in the three months ended March 31, 2023.

Throughout 2023, management identified one loan, collateralized by a multifamily property in Columbus, Ohio, with an initial unpaid principal value of $12.8 million as impaired due to monetary default resulting in a risk rating of "5." In the first quarter of 2023, this loan was placed on non-accrual status with interest collections accounted for under the cost recovery method. As of December 31, 2023, the carrying value of this loan was $8.9 million, which reflected a $5.0 million payment received on November 25, 2023 under an insurance claim, of which $3.1 million was applied to carrying value reduction and a $1.9 million payable established primarily related to a tenant settlement. As of December 31, 2023, no specific reserves were required after analysis of the underlying collateral value. In the first quarter of 2024, we received additional insurance proceeds in the amount of $13.5 million which reduced the carrying value of this loan to $0, and after taking into consideration repayment of an interest rate cap and certain legal and other costs and amounts deemed recoverable, resulting in the recognition of approximately $2.5 million of income in the quarter ended March 31, 2024.

During the period ended December 31, 2023, management identified one loan, collateralized by a multifamily property in Virginia Beach, VA, with an unpaid principal balance of $36.8 million as impaired due to monetary default resulting in a risk rating of "5"; however no specific asset reserves were required after analysis of underlying collateral value. This loan was on non-accrual status as a result of monetary default and impaired loan classification. In the first quarter of 2024, the Company and the borrower entered into a loan modification and the loan was loan returned to accrual status. In connection with the modification, the borrower, among other things, made a principal payment of approximately $3.6 million and brought current any past due interest, escrows and reserves, which resulted in interest of approximately $0.5 million that was unpaid as of December 31, 2023 recognized as income in the quarter ended March 31, 2024. The note rate on the loan was amended to SOFR + 400 basis points from SOFR + 327 basis points and the stated maturity date of the loan has been amended to April 5, 2024, with the ability for borrower to extend, under certain conditions, to May 3, 2024. On May 3, 2024, the loan repaid in full according to the terms of loan modification.

NOTE 4 - USE OF SPECIAL PURPOSE ENTITIES AND VARIABLE INTEREST ENTITIES

We account for CLO transactions and secured financings on our consolidated balance sheet as financing facilities. The issuing entities for our CLOs and secured financings are VIEs for which we are the primary beneficiary and are consolidated in our financial statements. The investment grade tranches are treated as secured financings, and are non-recourse to us. See Note 2 ("Summary of Significant Accounting Policies - Principles Consolidation - VIE") for further discussion.

On June 14, 2021, the Company completed the 2021-FL1 CLO, issuing eight tranches of CLO notes through two newly-formed wholly-owned subsidiaries totaling $903.8 million. Of the total CLO notes issued $833.8 million were investment grade notes issued to third party investors and $70 million were below investment-grade notes retained by us. In addition, a $96.25 million equity interest in the portfolio was retained by us. The financing has an initial two-and-a-half year reinvestment period, which expired in December 2023, that allowed principal proceeds of the loan obligations to be reinvested in qualifying replacement loan obligations, subject to the satisfaction of certain conditions set forth in the indenture. Thereafter, the outstanding debt balance will be reduced as loans are repaid. Initially, the proceeds of the issuance of the securities also included $330.3 million for the purpose of acquiring additional loan obligations for a period of to 180 days from the 2021-FL1 CLO closing date, resulting in the issuer owning loan obligations with a face value of $1.0 billion, representing leverage at closing of 83%.

On July 12, 2023, the Company entered into and closed a matched-term non-recourse collateralized commercial real estate financing (the "LMF 2023-1 Financing"), secured by $386.4 million of first lien floating-rate multifamily mortgage assets and is not subject to margin calls or additional collateralization requirements. In connection with the LMF 2023-1 Financing, approximately $270.4 million of an investment-grade rated senior secured floating rate loan was provided by a private lender and approximately $47.3 million of investment-grade rated notes (collectively, the "Senior Debt") were issued and sold to an affiliate of LFT's external manager, Lument IM. A consolidated subsidiary of LFT retained the subordinate notes in the issuing vehicle of approximately $68.6 million. The Senior Debt has an initial weighted average spread of approximately 314 basis points over 30-day Term SOFR, excluding fees and transaction costs. The Senior Debt matures on the payment date in July 2032, unless it is sooner repaid or redeemed in accordance with its terms. The financing has an initial two-year reinvestment period that allows principal proceeds of the loan obligations to be reinvested in qualifying replacement loan obligations, subject to the satisfaction of certain conditions set forth in the indenture. Thereafter, the outstanding debt balance will be reduced as loans are repaid.

The 2021-FL1 CLO and LMF 2023-1 Financing are subject to collateralization and coverage tests that are customary for these types of securitizations. As of March 31, 2024 and December 31, 2023 all such collateralization and coverage tests in the 2021-FL1 CLO and LMF 2023-1 Financing were met.

The carrying values of the Company's total assets and liabilities related to the 2021-FL1 CLO and LMF 2023-1 Financing at March 31, 2024 and December 31, 2023 included the following VIE assets and liabilities:

ASSETSMarch 31, 2024December 31, 2023
Cash, cash equivalents and restricted cash$72,845 $270,217 
Other receivable61,734  
Accrued interest receivable8,248,978 8,588,805 
Investment related receivable17,320,000  
Loans held for investment, net of allowance for credit losses1,285,718,344 1,375,277,312 
Total Assets$1,311,421,901 $1,384,136,334 
LIABILITIES
Accrued interest payable$3,754,453 $3,996,538 
Collateralized loan obligations and secured financings(1)
1,075,890,203 1,146,210,752 
Total Liabilities$1,079,644,656 $1,150,207,290 
14



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2024
NOTE 4 – USE OF SPECIAL PURPOSE ENTITIES AND VARIABLE INTEREST ENTITIES (Continued)
Equity231,777,245 233,929,044 
Total liabilities and equity$1,311,421,901 $1,384,136,334 

(1)     The stated maturity of the collateral loan obligations per the terms of the underlying collateralized loan obligation agreement is June 14, 2039 for the 2021-FL1 CLO and the stated maturity of the secured financing per the terms of the underlying indenture is July 20, 2032.

The following tables present certain loan and borrowing characteristics of the 2021-F1 CLO and LMF 2023-1 Financing as of March 31, 2024 and December 31, 2023:

As of March 31, 2024
Collateralized Loan Obligations/FinancingsCountPrincipal Value
Carrying Value(1)
Wtd. Avg. Coupon(2)
Collateral (loan investments)81$1,299,971,777 $1,285,718,344 
8.92%
Financing provided2$1,080,245,794 $1,075,890,203 
7.36%

As of December 31, 2023
Collateralized Loan Obligations/FinancingsCountPrincipal Value
Carrying Value(1)
Wtd. Avg. Coupon(2)
Collateral (loan investments)87$1,388,495,984 $1,375,277,312 
8.91%
Financing provided2$1,151,450,000 $1,146,210,752 
7.35%

(1)     The carrying value of the collateral is net of unaccreted purchase discounts of $6,289,627 and $7,159,664 as of March 31, 2024 and December 31, 2023, respectively. The carrying value for the 2021-FL1 CLO is net of debt issuance costs of $1,281,294 and $1,911,547 for March 31, 2024 and December 31, 2023, respectively and the carrying value for LMF 2023-1 Financing is net of debt issuance costs of $3,074,297 and 3,327,701 for March 31, 2024 and December 31, 2023, respectively.
(2)    Weighted average coupon for loan investments assumes applicable 30-day Term SOFR of 5.32% and 5.33% as of March 31, 2024 and December 31, 2023, respectively, inclusive of weighted average interest rate floors of 0.40% and 0.38%, and spreads of 3.60% and 3.54%, respectively. Weighted average coupon for the financings assumes applicable 30-day Term SOFR of 5.33% and 5.36% as of March 31, 2024 and December 31, 2023, respectively and spreads of 2.03% and 1.99% for March 31, 2024 and December 31, 2023, respectively.

The statement of operations related to the 2021-FL1 CLO and LMF 2023-1 Financing for the three months ended March 31, 2024 and March 31, 2023 include the following income and expense items:

Statements of OperationsThree Months Ended March 31, 2024Three Months Ended March 31, 2023
Interest income$31,380,934 $20,798,409 
Interest expense(21,511,754)(13,033,046)
     Net interest income$9,869,180 $7,765,363 
Less:
(Provision for) reversal of credit losses(1,757,456)14,216 
General and administrative fees(246,746)(143,349)
     Net income$7,864,978 $7,636,230 

NOTE 5 - RESTRICTED CASH

2021-FL1 CLO was actively managed with an initial reinvestment period of 30 months which expired in December 2023. LMF 2023-1 Financing is actively managed with an initial reinvestment period of 24 months that expires in July 2025. As loans payoff or mature, as applicable, during this reinvestment period, cash received is restricted and intended to be reinvested within LMF 2023-1 Financing in accordance with the terms and conditions of its respective governing agreement.

NOTE 6 - SECURED TERM LOAN

On January 15, 2019, the Company, together with its FOAC and Lument CMT Equity subsidiaries (together with the Company, the "Credit Parties"), entered into the Secured Term Loan, as amended on February 13, 2019, July 9, 2020, April 21, 2021 and February 22, 2022 with the lenders party thereto and Cortland Capital Market Services, LLC, as administrative agent (in such capacity, the "Agent"), providing for a term facility ("Credit Agreement") to be drawn in an aggregate principal amount of $40.25 million with a maturity of 6 years.

The borrowings under the Secured Term Loan are joint and several obligations of the Credit Parties. In addition, the Credit Parties' obligations under the Secured Term Loan are secured by substantially all the assets of the Credit Parties through pledge and security documentation. Amounts advanced under the Secured Term Loan are subject to compliance with a borrowing base comprised of assets of the Credit Parties and certain of their subsidiaries, and include
15



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2024
NOTE 6 – SECURED TERM LOAN (Continued)
senior and subordinated CRE mortgage loans, preferred equity in CRE assets (directly or indirectly), CRE construction mortgage loans and certain types of equity interests (the "Eligible Assets"). Borrowings under the Secured Term Loan bear interest at a fixed rate of 7.25% for the six-year period following the initial draw-down, which is subject to step up by 0.25% for the first four months after the sixth anniversary of the borrowing of the Senior Secured Term Loan, then by 0.375% for the following four months, then by 0.50% for the last four months until maturity.

In response to the COVID-19 pandemic, on July 9, 2020, the Company entered into the Second Amendment to the Credit and Guaranty Agreement. This amendment provides the Company with additional flexibility to effectively manage any potential borrower distress related to COVID-19 that were not originally contemplated in loan documentation.

On April 21, 2021, the Company, together with its Credit Parties, entered into an amendment (the "Third Amendment") to the Credit and Guaranty Agreement. The amendment, among other things, (i) provides the Company with an incremental secured term loan in the aggregate principal amount of $7.5 million; (ii) extends the maturity date of the Secured Term Loan from February 14, 2025 to February 14, 2026; (iii) amends certain asset concentration limits and (iv) amends certain financial covenants. On May 5, 2021 the Third Amendment became effective. On August 23, 2021, the Company drew down the $7.5 million incremental secured term loan.

On February 14, 2019, the Company drew on the Secured Term Loan in the aggregate principal amount of $40.25 million generating net proceeds of $39.2 million. The outstanding balance of the Secured Term Loan in the table below is presented gross of deferred financing costs ($467,648 and $529,774 at March 31, 2024 and December 31, 2023, respectively). As of March 31, 2024 and December 31, 2023, the outstanding balance and total commitment under the Credit Agreement consisted of the following:

March 31, 2024December 31, 2023
Outstanding BalanceTotal CommitmentOutstanding BalanceTotal Commitment
Secured Term Loan$47,750,000 $47,750,000 $47,750,000 $47,750,000 
Total$47,750,000 $47,750,000 $47,750,000 $47,750,000 

On February 22, 2022, the Company, together with its Credit Parties, entered into an amendment (the "Fourth Amendment") to the Credit and Guaranty Agreement. This amendment waived the step-down provisions of the maximum total net leverage financial covenant in connection with the February 2022 rights offering, however the step-down provision remains in place for future capital raises.

The Credit Agreement contains affirmative and negative covenants binding the Company and its subsidiaries that are customary for credit facilities of this type, including, but not limited to: minimum asset coverage ratio; minimum unencumbered assets ratio; maximum total net leverage ratio; minimum tangible net worth; and an interest charge coverage ratio. As of March 31, 2024 and December 31, 2023 we were in compliance with these covenants.

The Credit Agreement contains events of default that are customary for facilities of this type, including, but not limited to, nonpayment of principal, interest, fees and other amounts when due, violation of covenants, cross default with material indebtedness, and change of control.

NOTE 7 - MORTGAGE SERVICING RIGHTS

As of March 31, 2024, the Company retained the servicing rights associated with an aggregate principal balance of $66,370,595 of residential mortgage loans that the Company had previously transferred to residential mortgage loan securitization trusts. The Company's MSRs are held and managed at the Company's TRS, and the Company employs two licensed sub-servicers to perform the related servicing activities.

The following table presents the Company's MSR activity for the three months ended March 31, 2024 and the three months ended March 31, 2023:

 March 31, 2024March 31, 2023
Balance at beginning of period$691,973 $795,656 
Changes in fair value due to:
Changes in valuation inputs or assumptions used in valuation model(10,036)(20,916)
Other changes to fair value(1)
14,663 (28,212)
Balance at end of period$696,600 $746,528 
Loans associated with MSRs(2)
$66,370,595 $72,193,412 
MSR values as percent of loans(3)
1.05 %1.03 %
(1)Amounts represent changes due to realization of expected cash flows and prepayment of principal of the underlying loan portfolio.
(2)Amounts represent the unpaid principal balance of loans associated with MSRs outstanding at March 31, 2024 and March 31, 2023, respectively.
(3)Amounts represent the carrying value of MSRs at March 31, 2024 and March 31, 2023, respectively divided by the outstanding balance of the loans associated with these MSRs.

The following table presents the servicing income recorded on the Company's consolidated statements of operations for the three months ended March 31, 2024 and March 31, 2023:
16



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2023
NOTE 7 – MSRs (Continued)
Three Months Ended
March 31, 2024
Three Months Ended
March 31, 2023
Servicing income, net$38,503 $51,528 
Total servicing income$38,503 $51,528 

NOTE 8 - FAIR VALUE

The following tables summarize the valuation of the Company's assets and liabilities carried at fair value on a recurring basis within the fair value hierarchy levels as of March 31, 2024 and December 31, 2023:


 March 31, 2024
Quoted prices in
active markets
for identical assets
Level 1
Significant
other observable
inputs
Level 2
Unobservable
inputs
Level 3
Balance as of March 31, 2024
Assets:    
Mortgage servicing rights$ $ $696,600 $696,600 
Total$ $ $696,600 $696,600 

 December 31, 2023
Quoted prices in
active markets
for identical assets
Level 1
Significant
other observable
inputs
Level 2
Unobservable
inputs
Level 3
Balance as of
December 31, 2023
Assets:    
Mortgage servicing rights$ $ $691,973 $691,973 
Total$ $ $691,973 $691,973 

As of March 31, 2024 and December 31, 2023, the Company had $696,600 and $691,973, respectively, in Level 3 assets. The Company's Level 3 assets are comprised of MSRs. For more detail about Level 3 assets, also see Notes 2 and 7.

The following table provides quantitative information about the significant unobservable inputs used in the fair value measurement of the Company's MSRs classified as Level 3 fair value assets at March 31, 2024 and December 31, 2023:

As of March 31, 2024
Valuation TechniqueUnobservable InputRangeWeighted Average
Discounted cash flowConstant prepayment rate
8.0 - 9.1%
8.1 %
 Discount rate12.0 %12.0 %
As of December 31, 2023
Valuation TechniqueUnobservable InputRangeWeighted Average
Discounted cash flowConstant prepayment rate
8.0 - 10.3%
8.2 %
 Discount rate12.0 %12.0 %

As discussed in Note 2, GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate that value. The following table details the carrying amount, face amount and fair value of the financial instruments described in Note 2:
17



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2024
NOTE 8 – FAIR VALUE (Continued)
March 31, 2024
Level in Fair Value HierarchyCarrying ValueFace AmountFair Value
Assets:
Cash and cash equivalents1$64,573,372 $64,573,372 $64,573,372 
Restricted cash172,182 72,182 72,182 
Commercial mortgage loans held-for-investment, net31,285,478,916 1,299,971,777 1,293,893,150 
Total$1,350,124,470 $1,364,617,331 $1,358,538,704 
Liabilities:
Collateralized loan obligations and secured financings2$1,075,890,203 $1,080,245,794 $1,069,201,351 
Secured Term Loan347,282,352 47,750,000 46,368,979 
Total$1,123,172,555 $1,127,995,794 $1,115,570,330 

December 31, 2023
Level in Fair Value HierarchyCarrying ValueFace AmountFair Value
Assets:
Cash and cash equivalents1$51,247,063 $51,247,063 $51,247,063 
Restricted cash1270,129 270,129 270,129 
Commercial mortgage loans held-for-investment, net31,383,881,197 1,397,385,160 1,388,355,730 
Total$1,435,398,389 $1,448,902,352 $1,439,872,922 
Liabilities:
Collateralized loan obligations and secured financings2$1,146,210,752 $1,151,450,000 </