Investments in Distressed Loans and Foreclosed Real Estate

Investments in Distressed Loans

The Company’s investment in distressed loans consisted of the following at October 31, 2013 and 2012 (amounts in thousands):



	2013			2012
Unpaid principal balance	$	63,381		$	99,693
Discount on acquired loans	(27,007		)	(62,524		)
Carrying value	$	36,374		$	37,169

The Company's investment in distressed loans includes performing loans and non-performing loans and also includes investments in loan participations classified as secured borrowings under ASC 860, "Transfers and Servicing."

For acquired distressed loans where it is probable that the Company will collect less than the contractual amounts due under the terms of the loan based, at least in part, on the assessment of the credit quality of the borrowers, the loans are accounted for under ASC 310-30. Under ASC 310-30, provided the Company does not presently have the intention to utilize real estate secured by the loans for use in its operations or to significantly improve the collateral for resale, the amount by which the future cash flows expected to be collected at the acquisition date exceeds the estimated fair value of the loan, or accretable yield, is recognized in other income - net over the estimated remaining life of the loan using a level yield methodology. The difference between the contractually required payments of the loan as of the acquisition date and the total cash flows expected to be collected, or nonaccretable difference, is not recognized.

The Company may acquire distressed loans where it has determined that (1) it is possible to collect all contractual amounts due under the terms of the loan, (2) it expects to utilize the real estate secured by the loans in its operations, or (3) forecasted cash flows cannot be reasonably estimated. For non-performing loans acquired meeting any of these conditions, in accordance with ASC 310-10, "Receivable," ("ASC 310-10") the loans are classified as nonaccrual and interest income is not recognized. When a loan is classified as non-accrual, any subsequent cash receipt is accounted for using the cost recovery method. For performing loans, payments are applied to principal and interest in accordance with the terms of the loan when received. As of October 31, 2013, the Company had investments in performing and non-performing loans, accounted for in accordance with ASC 310-10, of $0.8 million and $21.4 million, respectively. At October 31, 2012, the Company had investments in non-performing loans, accounted for in accordance with ASC 310-10, of $9.2 million. The Company had no investments in performing loans at October 31, 2012.

For the year ended October 31, 2013, the Company, through Gibraltar purchased distressed loans for approximately $26.0 million. The purchases included performing and non-performing loans secured by retail shopping centers, residential land and golf courses located in seven states.

The following table summarizes, for the distressed loans acquired in fiscal 2012 that were accounted for in accordance with ASC 310-30, the accretable yield and the nonaccretable difference of the Company's investment in these loans as of their acquisition date (amounts in thousands).



	2012
Contractually required payments, including interest	$	58,234
Non-accretable difference	(8,235		)
Cash flows expected to be collected	49,999
Accretable yield	(20,514		)
Distressed loans carrying amount	$	29,485

There were no distressed loans purchased during the year ended October 31, 2013 that met the requirements of ASC 310-30.

The accretable yield activity for the Company’s investment in distressed loans accounted for under ASC 310-30 for the years ended October 31, 2013 and 2012 was as follows (amounts in thousands):



	2013			2012
Balance, beginning of period	$	17,196		$	42,326
Loans acquired				20,514
Additions	1,654			5,539
Deletions	(7,728		)	(40,227		)
Accretion	(4,516		)	(10,956		)
Balance, end of period	$	6,606		$	17,196

Additions primarily represent the reclassification to accretable yield from nonaccretable yield and the impact of impairments. Deletions primarily represent loan dispositions, which include foreclosure of the underlying collateral and resulting removal of the loans from the accretable yield portfolios, and reclassifications from accretable yield to nonaccretable yield. The reclassifications between accretable and nonaccretable yield and the accretion of interest income are based on various estimates regarding loan performance and the value of the underlying real estate securing the loans. As the Company continues to gather additional information regarding the loans and the underlying collateral, the accretable yield may change. Therefore, the amount of accretable income recorded in the years ended October 31, 2013 and 2012 is not necessarily indicative of future results.

Foreclosed Real Estate Owned

The following table presents the activity in REO at October 31, 2013, 2012 and 2011 (amounts in thousands):



	2013			2012			2011
Balance, beginning of period	$	58,353		$	5,939		$	—
Additions	23,470			54,174			5,939
Sales	(7,842		)	(1,353		)
Impairments	(505		)	(126		)
Depreciation	(504		)	(281		)
Balance, end of period	$	72,972		$	58,353		$	5,939

As of October 31, 2013, approximately $7.6 million and $65.3 million of REO was classified as held-for-sale and held-and-used, respectively. As of October 31, 2012, approximately $5.9 million and $52.4 million of REO was classified as held-for-sale and held-and-used, respectively. For the years ended October 31, 2013 and October 31, 2012, the Company recorded gains of $3.6 million and $0.6 million from acquisitions of REO through foreclosure, respectively.

General

The Company’s earnings from Gibraltar's operations, excluding its investment in the Structured Asset Joint Venture, are included in other income - net in its Condensed Consolidated Statements of Operations. In the years ended October 31, 2013 and 2012, the Company recognized $10.2 million and $4.5 million of earnings (excluding earnings from its investment in the Structured Asset Joint Venture), respectively, from Gibraltar's operations.