Investments in Distressed Loans and Foreclosed Real Estate

Investments in Distressed Loans

Investments in distressed loans consisted of the following at October 31, 2014 and 2013 (amounts in thousands):



	2014			2013
Unpaid principal balance	$	13,187		$	63,381
Discount on acquired loans	(9,186		)	(27,007		)
Carrying value	$	4,001		$	36,374

Our investments in distressed loans include performing loans and non-performing loans and also include investments in loan participations classified as secured borrowings under ASC 860, “Transfers and Servicing.”

For acquired distressed loans where it is probable that we 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 we do not presently have the intention to utilize real estate secured by the loans for use in our 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 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 our investment in these loans as of their acquisition date (amounts in thousands):



	2012
Contractually required payments, including interest	$	58,234
Nonaccretable 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 years ended October 31, 2014 and 2013, that met the requirements of ASC 310-30.

The accretable yield activity for investments in distressed loans accounted for under ASC 310-30 for the years ended October 31, 2014, 2013, and 2012, was as follows (amounts in thousands):



	2014			2013			2012
Balance, beginning of period	$	6,606		$	17,196		$	42,326
Loans acquired	—			—			20,514
Additions	554			1,654			5,539
Deletions	(6,204		)	(7,728		)	(40,227		)
Accretion	(956		)	(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 of October 31, 2014, we have no distressed loans where interest is accreting.

We also acquire distressed loans where we have determined that (i) it is possible to collect all contractual amounts due under the terms of the loan, (ii) we expect to utilize the real estate secured by the loans in our operations, or (iii) 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 nonaccrual, 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. At October 31, 2014 and 2013, we had investments in performing and non-performing loans, accounted for in accordance with ASC 310-10, as follows (amounts in thousands):



	2014		2013
Performing loans	$	—	$	827
Non-performing loans	$	4,001	$	21,449

For the year ended October 31, 2013, we, 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. No loans were purchased during the year ended October 31, 2014.

Foreclosed Real Estate Owned (REO)

The following table presents the activity in REO at October 31, 2014, 2013, and 2012 (amounts in thousands):



	2014			2013			2012
Balance, beginning of period	$	72,972		$	58,353		$	5,939
Additions	22,220			23,470			54,174
Sales	(23,696		)	(7,842		)	(1,353		)
Impairments	(1,358		)	(505		)	(126		)
Depreciation	(339		)	(504		)	(281		)
Balance, end of period	$	69,799		$	72,972		$	58,353

As of October 31, 2014, approximately $11.7 million and $58.1 million of REO were classified as held-for-sale and held-and-used, respectively. As of October 31, 2013, approximately $7.6 million and $65.3 million of REO were classified as held-for-sale and held-and-used, respectively. For the years ended October 31, 2014, 2013, and 2012, we recorded gains of $4.5 million, $3.6 million, and $0.6 million from acquisitions of REO through foreclosure, respectively.

General

Our earnings from Gibraltar’s operations, excluding our investment in the Structured Asset Joint Venture, are included in “Other income - net” in the Consolidated Statements of Operations and Comprehensive Income. In the years ended October 31, 2014, 2013, and 2012, we recognized $14.4 million, $10.2 million, and $4.5 million, of earnings (excluding earnings from our investment in the Structured Asset Joint Venture), respectively, from Gibraltar’s operations.