Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES    EXCHANGE ACT OF 1934

For the transition period from _________ to __________

Commission File Number: 1-32733
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12243045&doc=13
RESOURCE CAPITAL CORP.
(Exact name of registrant as specified in its charter)
Maryland
 
20-2287134
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
717 Fifth Avenue, New York, New York 10022
(Address of principal executive offices) (Zip Code)
 
 
 
(212) 621-3210
(Registrant's telephone number, including area code)
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 þ 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
Accelerated filer
þ
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
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 þ No
The number of outstanding shares of the registrant's common stock on May 4, 2018 was 31,650,417 shares.


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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT
ON FORM 10-Q

 
 
PAGE
PART I
 
 
Item 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2:
 
 
 
Item 3:
 
 
 
Item 4:
 
 
 
PART II
 
 
 
 
 
Item 1:
 
 
 
Item 1A:
 
 
 
Item 6:
 
 
 




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PART I
ITEM 1.    FINANCIAL STATEMENTS
RESOURCE CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
March 31,
2018
 
December 31,
2017
 
(unaudited)
 
 
ASSETS (1)
 
 
 
Cash and cash equivalents
$
61,500

 
$
181,490

Restricted cash
546

 
22,874

Accrued interest receivable
6,945

 
6,859

CRE loans, net of allowances of $4,529 and $5,328
1,376,999

 
1,284,822

Investment securities available-for-sale
250,746

 
211,737

Investment securities, trading
164

 
178

Loans held for sale

 
13

Principal paydowns receivable
20

 
76,129

Investments in unconsolidated entities
6,439

 
12,051

Derivatives, at fair value
1,751

 
602

Direct financing leases, net of allowances of $735
89

 
151

Other assets
6,981

 
7,451

Assets held for sale (amounts include $57,341 and $61,841 of legacy CRE loans held for sale in continuing operations, see Note 21)
77,621

 
107,718

Total assets
$
1,789,801

 
$
1,912,075

LIABILITIES (2)
 

 
 

Accounts payable and other liabilities
$
6,654

 
$
5,153

Management fee payable
938

 
1,035

Accrued interest payable
3,244

 
4,387

Borrowings
1,222,386

 
1,163,485

Distributions payable
3,308

 
5,581

Preferred stock redemption liability

 
50,000

Derivatives, at fair value

 
76

Accrued tax liability
209

 
540

Liabilities held for sale (see Note 21)
2,883

 
10,342

Total liabilities
1,239,622

 
1,240,599

STOCKHOLDERS' EQUITY
 

 
 

Preferred stock, par value $0.001:  10,000,000 shares authorized 8.25% Series B Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share; 0 and 4,613,596 shares issued and outstanding

 
5

Preferred stock, par value $0.001:  10,000,000 shares authorized 8.625% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share; 4,800,000 and 4,800,000 shares issued and outstanding
5

 
5

Common stock, par value $0.001:  125,000,000 shares authorized; 31,650,417 and 31,429,892 shares issued and outstanding (including 465,808 and 483,073 unvested restricted shares)
32

 
31

Additional paid-in capital
1,080,927

 
1,187,911

Accumulated other comprehensive income
1,154

 
1,297

Distributions in excess of earnings
(531,939
)
 
(517,773
)
Total stockholders' equity
550,179

 
671,476

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
1,789,801

 
$
1,912,075


The accompanying notes are an integral part of these statements
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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
(in thousands, except share and per share data)
 
March 31,
2018
 
December 31,
2017
 
(unaudited)
 
 
(1) Assets of consolidated variable interest entities ("VIEs") included in total assets above:
 
 
 
Restricted cash
$
513

 
$
20,846

Accrued interest receivable
2,728

 
3,347

CRE loans, pledged as collateral and net of allowances of $844 and $1,330
571,640

 
603,110

Loans held for sale

 
13

Principal paydowns receivable
20

 
72,207

Other assets
188

 
73

Total assets of consolidated VIEs
$
575,089

 
$
699,596

 
 
 
 
(2) Liabilities of consolidated VIEs included in total liabilities above:
 
 
 
Accounts payable and other liabilities
$
65

 
$
96

Accrued interest payable
412

 
592

Borrowings
298,970

 
416,655

Total liabilities of consolidated VIEs
$
299,447

 
$
417,343


The accompanying notes are an integral part of these statements
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4

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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)

 
For the Three Months Ended
 
March 31,
 
2018
 
2017
REVENUES
 
 
 
Interest income:
 
 
 
CRE loans
$
22,383

 
$
21,533

Securities
3,456

 
2,308

Other
118

 
1,630

Total interest income
25,957

 
25,471

Interest expense
14,384

 
14,254

Net interest income
11,573

 
11,217

Other (expense) revenue
(95
)
 
928

Total revenues
11,478

 
12,145

OPERATING EXPENSES
 

 
 

Management fees
2,813

 
2,680

Equity compensation
967

 
788

General and administrative
3,060

 
3,863

Depreciation and amortization
13

 
68

Impairment losses

 
177

(Recovery of) provision for loan and lease losses, net
(799
)
 
999

Total operating expenses
6,054

 
8,575

 
 
 
 
 
5,424

 
3,570

OTHER INCOME (EXPENSE)
 

 
 

Equity in (losses) earnings of unconsolidated entities
(292
)
 
361

Net realized and unrealized (loss) gain on investment securities available-for-sale and loans and derivatives
(642
)
 
7,606

Net realized and unrealized loss on investment securities, trading
(5
)
 
(911
)
Fair value adjustments on financial assets held for sale
(4,665
)
 
(21
)
Other income
11

 
68

Total other (expense) income
(5,593
)
 
7,103

 
 
 
 
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE TAXES
(169
)
 
10,673

Income tax benefit (expense)
32

 
(1,499
)
NET (LOSS) INCOME FROM CONTINUING OPERATIONS
(137
)
 
9,174

NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX
247

 
(561
)
NET INCOME
110

 
8,613

Net income allocated to preferred shares
(5,210
)
 
(6,014
)
Consideration paid in excess of carrying value of preferred shares
(7,482
)
 

Net loss allocable to non-controlling interest, net of taxes

 
101

NET (LOSS) INCOME ALLOCABLE TO COMMON SHARES
$
(12,582
)
 
$
2,700

NET (LOSS) INCOME PER COMMON SHARE - BASIC:
 
 
 
CONTINUING OPERATIONS
$
(0.41
)
 
$
0.11

DISCONTINUED OPERATIONS
$
0.01

 
$
(0.02
)
TOTAL NET (LOSS) INCOME PER COMMON SHARE - BASIC
$
(0.40
)
 
$
0.09

NET (LOSS) INCOME PER COMMON SHARE - DILUTED:
 
 
 
CONTINUING OPERATIONS
$
(0.41
)
 
$
0.11

DISCONTINUED OPERATIONS
$
0.01

 
$
(0.02
)
TOTAL NET (LOSS) INCOME PER COMMON SHARE - DILUTED
$
(0.40
)
 
$
0.09

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC
31,111,315

 
30,752,006

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED
31,111,315

 
30,914,148


The accompanying notes are an integral part of these statements
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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)

 
For the Three Months Ended
 
March 31,
 
2018
 
2017
Net income
$
110

 
$
8,613

Other comprehensive income (loss):
 

 
 

Reclassification adjustments for realized losses on investment securities available-for-sale included in net income
217

 

Unrealized (losses) gains on investment securities available-for-sale, net
(1,509
)
 
134

Reclassification adjustments associated with unrealized losses from interest rate hedges included in net income

 
18

Unrealized gains on derivatives, net
1,149

 

Total other comprehensive (loss) income
(143
)
 
152

Comprehensive (loss) income before allocation to non-controlling interests and preferred shares
(33
)
 
8,765

Net loss allocable to non-controlling interest

 
101

Net income allocated to preferred shares
(5,210
)
 
(6,014
)
Consideration paid in excess of carrying value of preferred shares
(7,482
)
 

Comprehensive (loss) income allocable to common shares
$
(12,725
)
 
$
2,852



The accompanying notes are an integral part of these statements
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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2018
(in thousands, except share and per share data)
(unaudited)

 
Common Stock
 
Series B Preferred Stock
 
Series C Preferred Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income
 
Retained Earnings
 
Distributions in Excess of Earnings
 
Total Stockholders' Equity
 
Shares
 
Amount
 
 
 
 
 
 
 
Balance, January 1, 2018
31,429,892

 
$
31

 
$
5

 
$
5

 
$
1,187,911

 
$
1,297

 
$

 
$
(517,773
)
 
$
671,476

Offering costs

 

 

 

 

 

 

 

 

Stock based compensation
229,384

 
1

 

 

 

 

 

 

 
1

Amortization of stock based compensation

 

 

 

 
967

 

 

 

 
967

Retirement of common stock
(7,134
)
 

 

 

 
(70
)
 

 

 

 
(70
)
Forfeiture of unvested stock
(1,725
)
 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 
110

 

 
110

Distributions on preferred stock

 

 

 

 

 

 
(5,210
)
 

 
(5,210
)
Preferred stock redemption

 

 
(5
)
 

 
(107,881
)
 

 
(7,482
)
 

 
(115,368
)
Securities available-for-sale, fair value adjustment, net

 

 

 

 

 
(1,292
)
 

 

 
(1,292
)
Designated derivatives, fair value adjustment

 

 

 

 

 
1,149

 

 

 
1,149

Distributions on common stock

 

 

 

 

 

 
12,582

 
(14,166
)
 
(1,584
)
Balance, March 31, 2018
31,650,417

 
$
32

 
$

 
$
5

 
$
1,080,927

 
$
1,154

 
$

 
$
(531,939
)
 
$
550,179



The accompanying notes are an integral part of these statements
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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)


 
For the Three Months Ended
 
March 31,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
110

 
$
8,613

Net (income) loss from discontinued operations, net of tax
(247
)
 
561

Net (loss) income from continuing operations
(137
)
 
9,174

Adjustments to reconcile net (loss) income from continuing operations to net cash provided by continuing operating activities:
 
 
 
(Recovery of) provision for loan and lease losses, net
(799
)
 
999

Depreciation, amortization and accretion
916

 
(349
)
Amortization of stock based compensation
967

 
788

Sale of and principal payments on syndicated corporate loans held for sale
41

 
1,076

Sale of and principal payments on investment securities, trading, net

 
4,493

Net realized and unrealized loss on investment securities, trading
5

 
911

Net realized and unrealized loss (gain) on investment securities available-for-sale and loans and derivatives
642

 
(7,606
)
Fair value adjustments on financial assets held for sale
4,665

 
21

Impairment losses

 
177

Equity in losses (earnings) of unconsolidated entities
292

 
(361
)
Return on investment from investments in unconsolidated entities

 
6,292

Changes in operating assets and liabilities
5,119

 
1,465

Net cash provided by continuing operating activities
11,711

 
17,080

Net cash (used in) provided by discontinued operating activities
(105
)
 
47,205

Net cash provided by operating activities
11,606

 
64,285

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Origination and purchase of loans
(142,124
)
 
(119,240
)
Principal payments received on loans and leases
127,456

 
116,159

Proceeds from sale of loans

 
21,250

Purchase of investment securities available-for-sale
(43,284
)
 

Principal payments on investment securities available-for-sale
3,572

 
7,519

Proceeds from sale of investment securities available-for-sale
59

 
9,422

Return of capital from investments in unconsolidated entities
5,376

 
7,703

Settlement of derivative instruments
(46
)
 
106

Net cash (used in) provided by continuing investing activities
(48,991
)
 
42,919

Net cash provided by discontinued investing activities
12,730

 
4,902

Net cash (used in) provided by investing activities
(36,261
)
 
47,821

 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Repurchase of common stock

 
(74
)
Retirement of common stock
(56
)
 

Repurchase of preferred stock
(165,340
)
 

Net proceeds from repurchase agreements
175,042

 
83,513

Payments on borrowings:
 
 
 

Securitizations
(118,243
)
 
(100,542
)
Distributions paid on preferred stock
(7,495
)
 
(6,014
)
Distributions paid on common stock
(1,571
)
 
(1,550
)
Net cash used in continuing financing activities
(117,663
)
 
(24,667
)
Net cash used in discontinued financing activities

 
(44,233
)
Net cash used in financing activities
(117,663
)
 
(68,900
)
 
 
 
 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
(142,318
)
 
43,206


The accompanying notes are an integral part of these statements
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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS − (Continued)
(in thousands)
(unaudited)

 
For the Three Months Ended
 
March 31,
 
2018
 
2017
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD
204,364

 
119,425

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD
$
62,046

 
$
162,631

SUPPLEMENTAL DISCLOSURE:
 

 
 

Interest expense paid in cash
$
13,266

 
$
12,648

Income taxes paid in cash
$

 
$
515


The accompanying notes are an integral part of these statements
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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018
(unaudited)



NOTE 1 - ORGANIZATION
Resource Capital Corp., a Maryland corporation, and its subsidiaries (collectively, the "Company") is a real estate investment trust ("REIT") that is primarily focused on originating, holding and managing commercial mortgage loans and commercial real estate-related debt investments. The Company is externally managed by Resource Capital Manager, Inc. (the "Manager"), which is an indirect wholly-owned subsidiary of C-III Capital Partners LLC ("C-III"), a leading commercial real estate ("CRE") investment management and services company engaged in a broad range of activities. C-III is the beneficial owner of approximately 2.4% of the Company's outstanding common shares at March 31, 2018.
The Company has qualified, and expects to qualify in the current fiscal year, as a REIT.
In November 2016, the Company received approval from its board of directors (the "Board") to execute a strategic plan (the "Plan") to focus its strategy on CRE debt investments. The Plan contemplates disposing of certain loans underwritten prior to 2010 ("legacy CRE loans"), exiting underperforming non-core asset classes (residential real estate-related assets and commercial finance assets) and establishing a dividend policy based on sustainable earnings. As a result, the Company evaluated its residential mortgage and middle market lending segments' assets and liabilities and determined both met all of the criteria to be classified as held for sale in the fourth quarter of 2016. As a result of the reclassification, these segments are reported as discontinued operations and have been excluded from continuing operations. See Note 21 for further discussion.
The following subsidiaries are consolidated in the Company's financial statements:
RCC Real Estate, Inc. ("RCC Real Estate"), a wholly-owned subsidiary, holds CRE loans, CRE-related securities and historically has held direct investments in real estate.  RCC Real Estate owns 100.0% of the equity of the following VIEs:
Resource Capital Corp. CRE Notes 2013, Ltd. ("RCC CRE Notes 2013") and Resource Capital Corp. 2014-CRE2, Ltd. ("RCC 2014-CRE2") were established to complete CRE securitization issuances secured by a portfolio of CRE loans. In December 2016 and August 2017, RCC CRE Notes 2013 and RCC 2014-CRE2, respectively, were liquidated and, as a result, the remaining assets were returned to the Company in exchange for the Company's preference shares and equity notes in the securitizations.
Resource Capital Corp. 2015-CRE3, Ltd. ("RCC 2015-CRE3"), Resource Capital Corp. 2015-CRE4, Ltd. ("RCC 2015-CRE4") and Resource Capital Corp. 2017-CRE5, Ltd. ("RCC 2017-CRE5") were each established to complete CRE securitization issuances secured by a separate portfolio of loans.
RCC Commercial, Inc. ("RCC Commercial"), a wholly-owned subsidiary, holds a 29.6% investment in NEW NP, LLC ("New NP, LLC"), which holds one directly originated middle market loan and historically held syndicated corporate loan investments. New NP, LLC is reported in discontinued operations, see Note 21 for further discussion. RCC Commercial also owns 100.0% of Apidos CDO III, Ltd. ("Apidos CDO III"). Apidos CDO III, a taxable REIT subsidiary ("TRS"), was established to complete a collateralized debt obligation ("CDO") issuance secured by a portfolio of syndicated corporate loans and asset-backed securities ("ABS"). In June 2015, the Company liquidated Apidos CDO III and, as a result, all of the assets were sold.
RCC Commercial II, Inc. ("Commercial II"), a wholly-owned subsidiary, invests in structured notes and subordinated notes of foreign, syndicated corporate loan collateralized loan obligation ("CLO") vehicles. Commercial II also owns equity in the following VIEs:
Commercial II owns 100.0% of the equity of Apidos Cinco CDO ("Apidos Cinco"), a TRS that was established to complete a CDO issuance secured by a portfolio of syndicated corporate loans, ABS and corporate bonds. In November 2016, the Company liquidated and sold substantially all of Apidos Cinco's assets. The remaining assets were consolidated by the Company upon liquidation and are marked at fair value.
Commercial II owns 68.3% of the equity of Whitney CLO I, Ltd. ("Whitney CLO I"), a TRS that holds residual assets following a September 2013 liquidation.

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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2018
(unaudited)

RCC Commercial III, Inc. ("Commercial III"), a wholly-owned subsidiary, holds investments in syndicated corporate loan investments.  Commercial III owns 90.0% of the equity of Apidos CDO I, LTD. ("Apidos CDO I"). Apidos CDO I, a TRS, was established to complete a CDO issuance secured by a portfolio of syndicated corporate loans and ABS. In October 2014, the Company liquidated Apidos CDO I and as a result substantially all of the assets were sold.
RSO EquityCo, LLC, a wholly-owned subsidiary, owns 10.0% of the equity of Apidos CDO I.
RCC Residential Portfolio, Inc. ("RCC Resi Portfolio"), a wholly-owned subsidiary, historically invested in residential mortgage-backed securities ("RMBS"). The remaining securities were sold in September 2017.
RCC Residential Portfolio TRS, Inc. ("RCC Resi TRS"), a wholly-owned TRS, was formed to hold strategic residential mortgage positions that could not be held by RCC Resi Portfolio. RCC Resi TRS also owns 100.0% of the equity, unless otherwise stated, in the following:
Primary Capital Mortgage, LLC ("PCM") (formerly known as Primary Capital Advisors, LLC), originated and serviced residential mortgage loans. In November 2016, PCM's operations were reclassified to discontinued operations. PCM sold its residential mortgage loan pipeline, its mortgage servicing rights and its remaining loans held for sale. See Note 21 for further discussion.
RCM Global Manager, LLC ("RCM Global Manager") owns 63.8% of RCM Global LLC ("RCM Global"). RCM Global, accounted for as an equity method investment, held a portfolio of investment securities available-for-sale.
RCC Residential Depositor, LLC ("RCC Resi Depositor") owns 100.0% of RCC Residential Acquisition, LLC ("RCC Resi Acquisition"). Prior to the Plan, RCC Resi Acquisition purchased residential mortgage loans from PCM and transferred the assets to RCC Residential Opportunities Trust ("RCC Opp Trust"). RCC Opp Trust, a wholly-owned statutory trust, held a portfolio of residential mortgage loans, available-for-sale.
Long Term Care Conversion Funding, LLC ("LTCC Funding") provided a financing facility to fund the acquisition of life settlement contracts.
Life Care Funding, LLC ("LCF") was established for the purpose of acquiring life settlement contracts. In July 2017, the Company purchased the balance of the outstanding membership interests of LCF, therefore becoming a single member LLC. In 2018, substantially all the life settlement contracts were sold.
RCC TRS, LLC ("RCC TRS") holds investments in direct financing leases and investment securities, trading. RCC TRS also owns equity in the following:
RCC TRS owns 100.0% of the equity of Resource TRS, LLC, which in turn holds a 25.8% investment in New NP, LLC, which is reported in discontinued operations.
RCC TRS owns 44.6% of the equity in New NP, LLC, which is reported in discontinued operations.
RCC TRS owns 80.2% of the equity in Pelium Capital, L.P. ("Pelium Capital"). Pelium Capital, accounted for as an equity method investment, held investment securities, trading.
Resource Capital Asset Management, LLC ("RCAM") was entitled to collect senior, subordinated and incentive fees related to CLO issuers to which it provided management services through CVC Credit Partners, LLC ("CVC Credit Partners"), formerly Apidos Capital Management ("ACM"), a subsidiary of CVC Capital Partners SICAV-FIS, S.A. ("CVC").  C-III sold its 24.0% interest in CVC Credit Partners in August 2017.

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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2018
(unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and the accounting policies set forth in Note 2 included in the Company's annual report on Form 10-K for the year ended December 31, 2017. The consolidated financial statements include the accounts of the Company, majority owned or controlled subsidiaries and VIEs for which the Company is considered the primary beneficiary. All inter-company transactions and balances have been eliminated in consolidation.
Basis of Presentation
All adjustments necessary to present fairly the Company's financial position, results of operations and cash flows have been made.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and all highly liquid investments with original maturities of three months or less at the time of purchase. At March 31, 2018 and December 31, 2017, approximately $58.3 million and $177.5 million, respectively, of the reported cash balances exceeded the Federal Deposit Insurance Corporation deposit insurance limit of $250,000 per institution. However, all of the Company's cash deposits are held at multiple, established financial institutions to minimize credit risk exposure.
Restricted cash includes required account balance minimums primarily for the Company's CRE CDO securitizations and cash held in the syndicated corporate loan CDOs.
The following table provides a reconciliation of cash, cash equivalents and restricted cash in the consolidated balance sheets to the total amount shown in the consolidated statements of cash flows (dollars in thousands):
 
As of
 
March 31, 2018
 
March 31, 2017
Cash and cash equivalents
$
61,500

 
$
157,760

Restricted cash
546

 
4,871

Total cash, cash equivalents and restricted cash shown on the Company's consolidated statements of cash flows
$
62,046

 
$
162,631

Preferred Equity Investment
Preferred equity investments, which are subordinate to any loans but senior to common equity, depending on the investment's characteristics, may be accounted for as real estate, joint ventures or as mortgage loans. The Company's preferred equity investment is accounted for as a CRE loan held for investment and is carried at cost, net of unamortized loan fees and origination costs and is included within CRE loans on the Company's consolidated balance sheets.  The Company accretes or amortizes any discounts or premiums over the life of the related loan utilizing the effective interest method. Interest and fees are recognized as income subject to recoverability, which is substantiated by obtaining annual appraisals on the underlying property.
Discontinued Operations
The results of operations of a component or a group of components of the Company that either has been disposed of or is classified as held for sale is reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on the Company's operations and financial results.

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12

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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2018
(unaudited)

Income Taxes
The Company established a full valuation allowance against its net deferred tax assets of approximately $39.0 million (tax effected $10.4 million) at March 31, 2018 as the Company believes it is more likely than not that some or all of the deferred tax assets will not be realized. This assessment was based on the Company's cumulative historical losses of and uncertainties as to the amount of taxable income that would be generated in future years by the Company's TRSs.
Recent Accounting Standards
Accounting Standards Adopted in 2018
In May 2017, the Financial Accounting Standards Board ("FASB") issued guidance to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Modification accounting should be applied unless all of the following three criteria are met: (i) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; (ii) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; (iii) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period. Adoption did not have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions, or disposals, of assets or businesses. The guidance provides a screen to determine when an integrated set of assets and activities (a "set") is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired, or disposed of, is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, the guidance requires that: (i) to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create an output and (ii) remove the evaluation of whether a market participant could replace missing elements. The guidance also narrows the definition of an output to: the result of inputs and processes applied to those inputs that provide goods or services to customers, investment income (such as dividends or interest), or other revenues. The guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period. Adoption did not have a material impact on the Company's consolidated financial statements.
In November 2016, the FASB issued guidance to reduce the diversity in practice of the classification and presentation of changes in restricted cash on the statement of cash flows. The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. The guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period. Adoption did not have a material impact on the Company's consolidated financial statements.
In August 2016, the FASB issued guidance to reduce the diversity in practice around the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. The guidance addresses the following eight specific cash flow issues: (i) debt prepayments or extinguishment costs; (ii) contingent consideration payments made after a business combination; (iii) proceeds from the settlement of insurance claims; (iv) proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); (v) settlement of zero-coupon debt instruments or other debt instruments with insignificant coupon rates; (vi) distributions received from equity method investees; (vii) beneficial interests in securitization transactions and (viii) separately identifiable cash flows and application of the predominance principle. The guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within that reporting period. Adoption did not have a material impact on the Company's consolidated financial statements.

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13

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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2018
(unaudited)

In January 2016, the FASB issued guidance to address certain aspects of the recognition, measurement, presentation and disclosure of financial instruments in order to provide users of financial statements with more decision-useful information. The guidance requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements, and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets.  It is effective for annual reporting periods, and the interim periods within those periods, beginning after December 15, 2017. Adoption did not have a material impact on the Company's consolidated financial statements.
In May 2014, the FASB issued guidance that establishes key principles by which an entity determines the amount and timing of revenue recognized from customer contracts. At issuance, the guidance was effective for the first interim or annual period beginning after December 15, 2016. In August 2015, the FASB issued additional guidance that delayed the previous effective date by one year, resulting in the original guidance becoming effective for the first interim or annual period beginning after December 15, 2017. Early application, which was not permissible under the initial effectiveness timeline, is now permissible though no earlier than as of the first interim or annual period beginning after December 15, 2016. In 2016, the FASB issued multiple amendments to the accounting standard to provide further clarification. Exclusions from the scope of this guidance include revenues resulting from loans, investment securities available-for-sale, investment securities, trading, investments in unconsolidated entities and leases. The Company evaluated the applicability of this guidance, considering the scope exceptions, and determined that adoption did not have a material impact on its consolidated financial statements.
Accounting Standards to be Adopted in Future Periods
In February 2018, the FASB issued guidance to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within that reporting period. Early adoption is permitted. The Company is in the process of evaluating the impact of this new guidance.
In August 2017, the FASB issued guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities. Additionally, the guidance simplifies the application of the hedge accounting guidance via certain targeted improvements. The guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within that reporting period. Early adoption is permitted. The Company is in the process of evaluating the impact of this new guidance.
In January 2017, the FASB issued guidance to add the Securities and Exchange Commission ("SEC") Staff Announcement "Disclosure of the Impact that Recently Issued Accounting Standards will have on the Financial Statements of a Registrant when such Standards are Adopted in a Future Period (in accordance with Staff Accounting Bulletin Topic 11.M)." The announcement applies to the May 2014 guidance on revenue recognition from contracts with customers, the February 2016 guidance on leases and the June 2016 guidance on how credit losses for most financial assets and certain other instruments that are measured at fair value through net income are determined. The announcement provides the SEC staff view that a registrant should evaluate certain recent accounting standards that have not yet been adopted to determine appropriate financial statement disclosures about the potential material effects of those recent accounting standards. If a registrant does not know or cannot reasonably estimate the impact that adoption of the recent accounting standards referenced in this announcement is expected to have on the financial statements, then the registrant should make a statement to that effect and consider the additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the recent accounting standards will have on the financial statements of the registrant when adopted. The Company completed its assessment under the new guidance on revenue recognition from contracts with customers, see "Account Standards Adopted in 2018." The Company is currently evaluating the impact of this guidance on leases and the measurement of credit losses on financial instruments and its impact on its consolidated financial statements.

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14

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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2018
(unaudited)

In June 2016, the FASB issued guidance which will change how credit losses for most financial assets and certain other instruments that are measured at fair value through net income are determined. The new guidance will replace the current incurred loss approach with an expected loss model for instruments measured at amortized cost. For available-for-sale debt securities, the guidance requires recording allowances rather than reducing the carrying amount, as it is currently under the other-than-temporary impairment model. It also simplifies the accounting model for credit-impaired debt securities and loans. This guidance is effective for annual reporting periods beginning after December 15, 2019, and interim periods within that reporting period. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods within that reporting period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company is in the process of evaluating the impact of this new guidance.
In February 2016, the FASB issued guidance requiring lessees to recognize a lease liability and a right-of-use asset for all leases. Lessor accounting will remain largely unchanged. The guidance will also require new qualitative and quantitative disclosures to help financial statement users better understand the timing, amount and uncertainty of cash flows arising from leases. This guidance will be effective for reporting periods beginning on or after December 15, 2018, with early adoption permitted. The Company is in the process of evaluating the impact of this new guidance.
Reclassifications
Certain reclassifications have been made to the 2017 consolidated financial statements to conform to the 2018 presentation.
NOTE 3 - VARIABLE INTEREST ENTITIES
The Company has evaluated its securities, loans, investments in unconsolidated entities, liabilities to subsidiary trusts issuing preferred securities (consisting of unsecured junior subordinated notes), securitizations, guarantees and other financial contracts in order to determine if they are variable interests in VIEs. The Company regularly monitors these legal interests and contracts and, to the extent it has determined that it has a variable interest, analyzes the related entity for potential consolidation.
Consolidated VIEs (the Company is the primary beneficiary)
Based on management's analysis, the Company is the primary beneficiary of Apidos CDO I, Apidos CDO III, Apidos Cinco, Whitney CLO I, RCC 2015-CRE3, RCC 2015-CRE4 and RCC 2017-CRE5 at March 31, 2018 and December 31, 2017 (for each period, collectively, the "Consolidated VIEs").
The Consolidated VIEs were formed on behalf of the Company to invest in real estate-related securities, CMBS, syndicated corporate loans, corporate bonds and ABS and were financed by the issuance of debt securities. The Manager and C-III Asset Management LLC ("C3AM"), a subsidiary of C-III, manage the CRE-related entities, and CVC Credit Partners manages the commercial finance-related entities on behalf of the Company. By financing these assets with long-term borrowings through the issuance of debt securities, the Company seeks to generate attractive risk-adjusted equity returns and to match the term of its assets and liabilities. The primary beneficiary determination for each of these VIEs was made at each VIE's inception and is continually assessed.
Apidos CDO I and Apidos CDO III substantially liquidated their assets in October 2014 and June 2015, respectively. The securitizations are now entirely composed of restricted cash.
In November 2016, the Company substantially liquidated Apidos Cinco, a syndicated corporate loan CLO determined to be a VIE that is managed by CVC Credit Partners. As a result of the liquidation, all senior and mezzanine notes of the securitization were repaid, leaving only the Company's equity interest in the securitization outstanding as of December 31, 2016. As substantially all of the VIE's activities were being conducted on behalf of a single variable interest holder that was a related party of the decision maker, it was determined that the Company was the primary beneficiary of the transaction and, as such, should consolidate Apidos Cinco. At March 31, 2018, the Company consolidates two syndicated corporate loans held by Apidos Cinco, accounted for using the fair value option given the short hold period.
Whitney CLO I was a securitization in which the Company acquired rights to manage the collateral assets held by the entity in February 2011. Following liquidation in September 2013, Whitney CLO I is now composed of restricted cash.
For a discussion of the Company's consolidated securitizations see Note 1, and for a discussion of the debt issued through the securitizations see Note 10.

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15

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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2018
(unaudited)

For consolidated CLOs in which the Company does not own 100% of the subordinated notes, the Company imputes an interest rate using expected cash flows over the life of each CLO and records the third party's share of the cash flows as interest expense on the consolidated statements of operations.
The Company has exposure to losses on its securitizations to the extent of its investments in the subordinated debt and preferred equity of each securitization. The Company is entitled to receive payments of principal and interest on the debt securities it holds and, to the extent revenues exceed debt service requirements and other expenses of the securitizations, distributions with respect to its preferred equity interests. As a result of consolidation, the debt and equity interests the Company holds in these securitizations have been eliminated, and the Company's consolidated balance sheets reflect the assets held, debt issued by the securitizations to third parties and any accrued payables to third parties. The Company's operating results and cash flows include the gross amounts related to the securitizations' assets and liabilities as opposed to the Company's net economic interests in the securitizations. Assets and liabilities related to the securitizations are disclosed, in the aggregate, on the Company's consolidated balance sheets.
The creditors of the Company's seven Consolidated VIEs have no recourse to the general credit of the Company, nor to each other. During the three months ended March 31, 2018, the Company provided no financial support to any of its VIEs nor does it have any requirement to do so, although it may choose to do so in the future to maximize future cash flows on such investments by the Company. There are no explicit arrangements that obligate the Company to provide financial support to any of its Consolidated VIEs.
The following table shows the classification and carrying values of assets and liabilities of the Company's Consolidated VIEs at March 31, 2018 (in thousands):
 
 
CRE Securitizations
 
Other
 
Total
ASSETS
 
 
 
 
 
 
Restricted cash
 
$
2

 
$
511

 
$
513

Accrued interest receivable
 
2,728

 

 
2,728

CRE loans, pledged as collateral
 
571,640

 

 
571,640

Principal paydowns receivable
 

 
20

 
20

Other assets
 
188

 

 
188

Total assets (1)
 
$
574,558

 
$
531

 
$
575,089

 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
Borrowings
 
$
298,970

 
$

 
$
298,970

Accrued interest payable
 
412

 

 
412

Accounts payable and other liabilities
 
65

 

 
65

Total liabilities
 
$
299,447

 
$

 
$
299,447

(1)
Assets of each of the Consolidated VIEs may only be used to settle the obligations of each respective VIE.
Unconsolidated VIEs (the Company is not the primary beneficiary, but has a variable interest)
Based on management's analysis, the Company is not the primary beneficiary of the VIEs discussed below since it does not have both (i) the power to direct the activities that most significantly impact the VIE's economic performance and (ii) the obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. Accordingly, the following VIEs are not consolidated in the Company's financial statements at March 31, 2018. The Company's maximum exposure to risk for each of these unconsolidated VIEs is set forth in the "Maximum Exposure to Loss" column in the table below.

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16

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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2018
(unaudited)

Unsecured Junior Subordinated Debentures
The Company has a 100% interest in the common shares of Resource Capital Trust I ("RCT I") and RCC Trust II ("RCT II"), respectively, with a value of $1.5 million in the aggregate, or 3% of each trust, at March 31, 2018. RCT I and RCT II were formed for the purposes of providing debt financing to the Company. The Company completed a qualitative analysis to determine whether or not it is the primary beneficiary of each of the trusts and determined that it was not the primary beneficiary of either trust because it does not have the power to direct the activities most significant to the trusts, which include the collection of principal and interest and protection of collateral through servicing rights. Accordingly, neither trust is consolidated into the Company's consolidated financial statements.
The Company records its investments in RCT I and RCT II's common shares of $774,000 each as investments in unconsolidated entities using the cost method, recording dividend income when declared by RCT I and RCT II. The trusts each hold subordinated debentures for which the Company is the obligor in the amount of $25.8 million for each of RCT I and RCT II. The debentures were funded by the issuance of trust preferred securities of RCT I and RCT II. The Company will continuously reassess whether it is deemed to be the primary beneficiary of the trusts.
RCM Global, LLC
In July 2014, the Company, together with Resource America, Inc., a wholly-owned subsidiary of C-III, ("Resource America") and certain Resource America employees, acquired through RCM Global a portfolio of available-for-sale securities for $23.5 million.  The portfolio is managed by Resource America. The Company contributed $15.0 million for a 63.8% membership interest. Revenues and expenses of RCM Global are allocated to each member in accordance with their membership interest. In March and June 2015, the Company requested and received an in-kind distribution in certain securities held by RCM Global resulting in a reduction of its ownership interest. RCM Global was determined to be a VIE based on the majority equity interest holders' inability to direct the activities that are most significant to the entity. In January 2016, the Company adopted the amendments to the consolidation guidance. Upon adoption, the Company reevaluated its variable interest in RCM Global and determined it would no longer be the primary beneficiary of RCM Global, as its investment in the limited liability company did not provide the Company with a controlling financial interest. As a result of its evaluation, the Company deconsolidated its investment in RCM Global. In January 2016, the Company began accounting for its investment in RCM Global as an equity method investment in investments in unconsolidated entities on its consolidated financial statements. At March 31, 2018, the Company held a 63.8% interest in RCM Global, and the remainder was owned by subsidiaries and other parties associated with Resource America. The Company held a $217,000 investment at March 31, 2018.
Pelium Capital
In September 2014, the Company contributed $17.5 million to Pelium Capital for an initial ownership interest of 80.4%, and subsequently funded its final commitment of $2.5 million in February 2015. Pelium Capital is a specialized credit opportunity fund managed by an indirect wholly-owned subsidiary of C-III. The Company receives 10% of the carried interest in the partnership. Resource America contributed cash of $2.8 million to the formation of Pelium Capital. In December 2015, Pelium Capital was accounted for as a consolidated voting interest subsidiary. In January 2016, the Company adopted the amendments to the consolidation guidance. Upon adoption, the Company reevaluated its interest in Pelium Capital and determined that although it now possessed a variable interest in Pelium Capital, it would not be the primary beneficiary of Pelium Capital, as its investment in the limited partnership does not provide the Company with a controlling financial interest. As a result of its reevaluation, the Company deconsolidated its investment in Pelium Capital in January 2016, and accounted for its investment as an equity method investment in investments in unconsolidated entities on its consolidated financial statements. At March 31, 2018, the Company held an 80.2% interest in Pelium Capital, with a carrying value of $4.7 million.
Wells Fargo Commercial Mortgage Trust 2017-C40
In October 2017, the Company purchased 95% of the Class E, F, G, H and J certificates of Wells Fargo Commercial Mortgage Trust 2017-C40 ("C40"), a B-piece investment in a Wells Fargo Commercial Mortgage Securities, Inc. a private-label $705.4 million securitization. C3AM, a related party that is not under common control, is the special servicer of C40. The Company determined that although its investment in C40 represented a variable interest, its investment did not provide the Company with a controlling financial interest. The Company accounted for its various investments in C40 as investment securities available-for-sale on its consolidated financial statements.

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17

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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2018
(unaudited)

Prospect Hackensack JV LLC
In March 2018, the Company invested $19.2 million in the preferred equity of Prospect Hackensack JV LLC ("Prospect Hackensack"), a joint venture between the Company and an unrelated third party ("Managing Member"). Prospect Hackensack was formed for the purpose of acquiring and operating a multifamily CRE property. The Managing Member will manage the daily operations of the property. The Company determined that although its investment in Prospect Hackensack represented a variable interest, its investment did not provide the Company with a controlling financial interest. The Company accounted for its investment in Prospect Hackensack's preferred equity as a CRE loan on its consolidated balance sheets.
The following table shows the classification, carrying value and maximum exposure to loss with respect to the Company's unconsolidated VIEs at March 31, 2018 (in thousands):
 
 
Unsecured Junior Subordinated Debentures
 
RCM Global LLC
 
Pelium Capital
 
C40
 
Prospect Hackensack
 
Total
 
Maximum Exposure to Loss
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accrued interest receivable
 
$

 
$

 
$

 
$

 
$
18

 
$
18

 
$

CRE loans
 

 

 

 

 
19,008

 
19,008

 
$
19,008

Investment securities available-for-sale (1)
 

 

 

 
20,855

 

 
20,855

 
$
20,763

Investments in unconsolidated entities
 
1,548

 
217

 
4,674

 

 

 
6,439

 
$
6,439

Total assets
 
1,548

 
217

 
4,674

 
20,855

 
19,026

 
46,320

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Borrowings
 
51,548

 

 

 

 

 
51,548

 
N/A

Total liabilities
 
51,548

 

 

 

 

 
51,548

 
N/A

Net asset (liability)
 
$
(50,000
)
 
$
217

 
$
4,674

 
$
20,855

 
$
19,026

 
$
(5,228
)
 
N/A

(1)
The Company's investment in C40 is carried at fair value and its maximum exposure to loss is the amortized cost of the investment.
At March 31, 2018, there were no explicit arrangements or implicit variable interests that could require the Company to provide financial support to any of its unconsolidated VIEs.
NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes the Company's supplemental disclosure of cash flow information (in thousands):
 
 
For the Three Months Ended
 
 
March 31,
 
 
2018
 
2017
Non-cash continuing financing activities include the following:
 
 

 
 

Distributions on common stock accrued but not paid
 
$
1,584

 
$
1,568

Distribution on preferred stock accrued but not paid
 
$
1,724

 
$
4,009


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18

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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2018
(unaudited)

NOTE 5 - LOANS
The following is a summary of the Company's loans (dollars in thousands, except amounts in footnotes):
Description
 
Quantity
 
Principal
 
Unamortized (Discount)
Premium, net
(1)
 
Amortized Cost
 
Allowance for Loan Losses
 
Carrying
Value
 (2)
 
Contracted Interest Rates (3)
 
Maturity Dates (4)(5)
At March 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CRE loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Whole loans (6)
 
75
 
$
1,369,753

 
$
(7,233
)
 
$
1,362,520

 
$
(4,529
)
 
$
1,357,991

 
1M LIBOR plus 3.50% to 1M LIBOR plus 6.25% (Floating) and 8.00% (Fixed)
 
April 2018 to April 2021
Preferred equity investment (see Note 3) (7)(8)
 
1
 
19,200

 
(192
)
 
19,008

 

 
19,008

 
11.50%
 
April 2025
Total CRE loans held for investment
 
 
 
1,388,953

 
(7,425
)
 
1,381,528

 
(4,529
)
 
1,376,999

 
 
 
 
Total loans
 
 
 
$
1,388,953

 
$
(7,425
)
 
$
1,381,528

 
$
(4,529
)
 
$
1,376,999

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2017:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CRE loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Whole loans (6)
 
70
 
$
1,297,164

 
$
(7,014
)
 
$
1,290,150

 
$
(5,328
)
 
$
1,284,822

 
1M LIBOR plus 3.60% to 1M LIBOR plus 6.25%
 
February 2018 to January 2021
Total CRE loans held for investment
 
 
 
1,297,164

 
(7,014
)
 
1,290,150

 
(5,328
)
 
1,284,822

 
 
 
 
Syndicated corporate loans (9)
 
2
 
13

 

 
13

 

 
13

 
N/A
 
N/A
Total loans held for sale
 
 
 
13

 

 
13

 

 
13

 
 
 
 
Total loans
 
 
 
$
1,297,177

 
$
(7,014
)
 
$
1,290,163

 
$
(5,328
)
 
$
1,284,835

 
 
 
 
(1)
Amounts include unamortized loan origination fees of $7.1 million and $6.7 million and deferred amendment fees of $368,000 and $268,000 being amortized over the life of the loans at March 31, 2018 and December 31, 2017, respectively.
(2)
Substantially all loans are pledged as collateral under various borrowings at March 31, 2018 and December 31, 2017.
(3)
LIBOR refers to the London Interbank Offered Rate.
(4)
Maturity dates exclude contracted extension options, subject to the satisfaction of certain terms, that may be available to the borrowers.
(5)
Maturity dates exclude one CRE whole loan, with an amortized cost of $7.0 million, in default at March 31, 2018 and December 31, 2017.
(6)
CRE whole loans had $86.2 million and $84.1 million in unfunded loan commitments at March 31, 2018 and December 31, 2017, respectively.  These unfunded loan commitments are advanced as the borrowers formally request additional funding, as permitted under the loan agreement, and any necessary approvals have been obtained.
(7)
The interest rate on the Company's preferred equity investment pays currently at 8.00%. The remaining interest is deferred until maturity.
(8)
Beginning in April 2023, the Company has the right to unilaterally force the sale of the underlying property.
(9)
All syndicated corporate loans are second lien loans and are accounted for under the fair value option.

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19

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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2018
(unaudited)

The following is a summary of the contractual maturities, assuming full exercise of the extension options available to the borrowers, of the Company's CRE loans held for investment, at amortized cost (in thousands, except amounts in footnotes):
Description
 
2018
 
2019
 
2020 and Thereafter
 
Total
At March 31, 2018:
 
 
 
 
 
 
 
 
Whole loans (1)
 
$

 
$
142,818

 
$
1,212,702

 
$
1,355,520

Preferred equity investment
 

 

 
19,008

 
19,008

Total CRE loans(1) 
 
$

 
$
142,818

 
$
1,231,710

 
$
1,374,528

 
 
 
 
 
 
 
 
 
Description
 
2018
 
2019
 
2020 and Thereafter
 
Total
At December 31, 2017:
 
 
 
 
 
 
 
 
Whole loans (1)
 
$

 
$
148,622

 
$
1,134,528

 
$
1,283,150

(1)
Excludes one CRE whole loan, with an amortized cost of $7.0 million, in default at March 31, 2018 and December 31, 2017.
At March 31, 2018, approximately 28.3%, 24.5% and 12.7% of the Company's CRE loan portfolio was concentrated in the Southwest, Pacific and Mountain regions, respectively, based on carrying value, as defined by the National Council of Real Estate Investment Fiduciaries ("NCREIF"). At December 31, 2017, approximately 28.0%, 24.3%, and 12.5% of the Company's CRE loan portfolio was concentrated in the Southwest, Pacific and Mountain regions, respectively, based on carrying value.
Principal Paydowns Receivable
Principal paydowns receivable represent loan principal payments that have been received by the Company's servicers and trustees but have not been remitted to the Company. At March 31, 2018, the Company had $20,000 of loan principal paydowns receivable, all of which was received in cash by the Company in April 2018. At December 31, 2017, the Company had $75.9 million of loan principal paydowns receivable, all of which was received in cash by the Company in January 2018.

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20

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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2018
(unaudited)

NOTE 6 - FINANCING RECEIVABLES
The following tables show the activity in the allowance for loan and lease losses for the three months ended March 31, 2018 and year ended December 31, 2017 and the allowance for loan and lease losses and recorded investments in loans and leases at March 31, 2018 and December 31, 2017 (in thousands):
 
 
Three Months Ended March 31, 2018
 
Year Ended December 31, 2017
 
 
Commercial Real Estate Loans
 
Direct Financing Leases
 
Total
 
Commercial Real Estate Loans
 
Syndicated Corporate Loans
 
Direct Financing Leases
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan and lease losses at beginning of period
 
$
5,328

 
$
735

 
$
6,063

 
$
3,829

 
$

 
$
465

 
$
4,294

Provision for (recovery of) loan and lease losses, net
 
(799
)
 

 
(799
)
 
1,499

 
3

 
270

 
1,772

Loans charged-off
 

 

 

 

 
(3
)
 

 
(3
)
Allowance for loan and lease losses at end of period
 
$
4,529

 
$
735

 
$
5,264

 
$
5,328

 
$

 
$
735

 
$
6,063

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2018
 
December 31, 2017
 
 
Commercial Real Estate Loans
 
Direct Financing Leases
 
Total
 
Commercial Real Estate Loans
 
Syndicated Corporate Loans
 
Direct Financing Leases
 
Total
Allowance for loan and lease losses ending balance:
 
 

 
 
 
 

 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
2,500

 
$

 
$
2,500

 
$
2,500

 
$

 
$
735

 
$
3,235

Collectively evaluated for impairment
 
$
2,029

 
$
735

 
$
2,764

 
$
2,828

 
$

 
$

 
$
2,828

Loans acquired with deteriorated credit quality
 
$

 
$

 
$

 
$

 
$

 
$

 
$

Loans and Leases:
 
 

 
 
 
 

 
 
 
 
 
 
 
 
Amortized cost ending balance:
 
 
 
 
 
 

 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
26,008

 
$

 
$
26,008

 
$
7,000

 
$

 
$
886

 
$
7,886

Collectively evaluated for impairment
 
$
1,355,520

 
$
824

 
$
1,356,344

 
$
1,283,150

 
$

 
$

 
$
1,283,150

Loans acquired with deteriorated credit quality
 
$

 
$

 
$

 
$

 
$

 
$

 
$


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21

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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2018
(unaudited)

Credit quality indicators
Commercial Real Estate Loans
CRE loans are collateralized by a diversified mix of real estate properties and are assessed for credit quality based on the collective evaluation of several factors, including but not limited to: collateral performance relative to underwritten plan, time since origination, current implied and/or reunderwritten LTV, loan structure and exit plan. Depending on the loan's performance against these various factors, loans are rated on a scale from 1 to 5, with loans rated 1 representing loans with the highest credit quality and loans rated 5 representing loans with lowest credit quality. The factors evaluated provide general criteria to monitor credit migration in the Company's loan portfolio, as such, a loan's rating may improve or worsen, depending on new information received.
The criteria set forth below should be used as general guidelines, and, therefore, not every loan will have all of the characteristics described in each category below. Loans that are performing according to their underwritten plans generally will not require an allowance for loan loss.
 
 
 
Risk Rating
 
Risk Characteristics
 
 
 
1
 
• Property performance has surpassed underwritten expectations.
 
 
• Occupancy is stabilized, the property has had a history of consistently high occupancy, and the property has a diverse and high quality tenant mix.
 
 
 
2
 
• Property performance is consistent with underwritten expectations and covenants and performance criteria are being met or exceeded.
 
 
• Occupancy is stabilized, near stabilized or is on track with underwriting.
 
 
 
3
 
• Property performance lags behind underwritten expectations.
 
 
• Occupancy is not stabilized and the property has some tenancy rollover.
 
 
 
4
 
• Property performance significantly lags behind underwritten expectations. Performance criteria and loan covenants have required occasional waivers.
 
 
• Occupancy is not stabilized and the property has a large amount of tenancy rollover.
 
 
 
5
 
• Property performance is significantly worse than underwritten expectations. The loan is not in compliance with loan covenants and performance criteria and is in default. Expected sale proceeds would not be sufficient to pay off the loan at maturity.
 
 
• The property has material vacancy and significant rollover of remaining tenants.
 
 
• An updated appraisal is required.
CRE loans are evaluated for any credit deterioration by debt asset management and certain finance personnel on at least a quarterly basis. Loans are first individually evaluated for impairment; and to the extent not deemed impaired, a general reserve is established.
The allowance for loan loss is computed as (i) 1.5% of the aggregate face values of loans rated as a 3, plus (ii) 5.0% of the aggregate face values of loans rated as a 4, plus (iii) specific allowances measured and determined on loans individually evaluated, which are loans rated as a 5. While the overall risk rating is generally not the sole factor used in determining whether a loan is impaired, a loan with a higher overall risk rating would tend to have more adverse indicators of impairment, and therefore would be more likely to experience a credit loss.

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22

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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2018
(unaudited)

Credit risk profiles of CRE loans at amortized cost were as follows (in thousands, except amounts in footnotes):
 
Rating 1
 
Rating 2
 
Rating 3
 
Rating 4
 
Rating 5
 
Held for Sale
 
Total
At March 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
 
Whole loans (1)
$
52,010

 
$
1,179,981

 
$
118,688

 
$
4,841

 
$
7,000

 
$

 
$
1,362,520

Preferred equity investment (2)

 
19,008

 

 

 

 

 
19,008

Legacy CRE whole loans (3)(4)

 

 

 

 

 
63,882

 
63,882

 
$
52,010

 
$
1,198,989

 
$
118,688

 
$
4,841

 
$
7,000

 
$
63,882

 
$
1,445,410

 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2017:
 

 
 

 
 

 
 

 
 

 
 

 
 

Whole loans (1)
$
65,589

 
$
1,040,883

 
$
171,841

 
$
4,837

 
$
7,000

 
$

 
$
1,290,150

Legacy CRE whole loans (3)(4)

 

 

 

 

 
63,783

 
63,783

 
$
65,589

 
$
1,040,883

 
$
171,841

 
$
4,837

 
$
7,000

 
$
63,783

 
$
1,353,933

(1)
Includes one CRE whole loan, with an amortized cost of $7.0 million, that was in default at March 31, 2018 and December 31, 2017.
(2)
The Company's preferred equity investment is evaluated individually for impairment and excluded from the general reserve calculation.
(3)
Legacy CRE whole loans are carried at the lower of cost or fair value.
(4)
Includes three and two legacy CRE whole loans that were in default with total carrying values of $40.5 million and $22.5 million at March 31, 2018 and December 31, 2017, respectively.
At March 31, 2018 and December 31, 2017, the Company had one CRE whole loan designated as an impaired loan with a risk rating of 5 due to short term vacancy/tenant concerns and a past due maturity of February 2017. The loan is collateralized by a retail shopping center in the Southeast region, as defined by the NCREIF, and had an amortized cost of $7.0 million at March 31, 2018 and December 31, 2017. The Company obtained an appraisal of the collateral in 2016, indicating a fair value of $4.5 million, which it relied upon as a practical expedient for determining the value of the loan at March 31, 2018 and December 31, 2017. No additional provision was recorded on the loan for the three months ended March 31, 2018 and March 31, 2017. This loan was in default at March 31, 2018 and December 31, 2017.
At March 31, 2018, the Company had four legacy CRE whole loans and one mezzanine loan included in assets held for sale with total carrying values of $57.3 million, comprising total amortized cost bases of $63.9 million less a valuation allowance of $6.6 million.
At December 31, 2017, the Company had four legacy CRE whole loans and one mezzanine loan included in assets held for sale with total carrying values of $61.8 million, comprising total amortized cost bases of $63.8 million less a valuation allowance of $1.9 million.
The mezzanine loan had no fair value at March 31, 2018 and December 31, 2017.
The Company obtained updated appraisals for one legacy CRE whole loan held for sale collateralized by a hotel in the Pacific region, as defined by the NCREIF, in April 2018. For the remaining three legacy CRE whole loans held for sale, the Company continued to rely on its appraisals obtained in 2016, as a practical expedient, in determining fair value at March 31, 2018.
Two of the four legacy CRE whole loans required a specific reserve upon transfer to held for sale in 2016 and are comprised of the following:
One CRE whole loan collateralized by an office property in the Mountain region, as defined by the NCREIF, with an initial par value of $17.7 million. Upon transfer to held for sale in 2016, this loan was written down to its estimated fair value of $11.0 million, which remains the carrying value at March 31, 2018 and December 31, 2017. No additional valuation adjustments were recognized for the three months ended March 31, 2018 and 2017. The loan matured in May 2017 and is currently in default;

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23

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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2018
(unaudited)

One CRE whole loan collateralized by a hotel in the Pacific region, as defined by the NCREIF, with an initial par value of $29.5 million. Upon transfer to held for sale in 2016, this loan was written down to its estimated fair value of $24.0 million. At March 31, 2018 and December 31, 2017, the loan had a carrying value of $18.0 million and $22.5 million, respectively. An additional fair value adjustment of $4.7 million, which included protective advances of $172,000, to reduce the carrying value was recognized during the three months ended March 31, 2018. This adjustment was recorded based on the receipt of updated appraisals in April 2018 and was recognized in fair value adjustments on financial assets held for sale in the Company's consolidated statements of operations. No valuation adjustments were recognized for the three months ended March 31, 2017. The loan has a maturity date in January 2019 and is currently in default.
The remaining two legacy CRE whole loans required no specific reserve upon transfer to held for sale in 2016. One loan is collateralized by a retail shopping center in the Pacific region, as defined by the NCREIF, and had a carrying value of $11.5 million at March 31, 2018 and December 31, 2017. The loan had a maturity date in December 2017 and is currently in technical default. The second loan is collateralized by a retail shopping center in the Pacific region, as defined by the NCREIF, and had a carrying value of $16.8 million at March 31, 2018 and December 31, 2017. The loan has a maturity date in January 2019. For these two loans, the Company determined that no additional valuation adjustments were necessary for the three months ended March 31, 2018 and 2017.
At March 31, 2018, 49.4%, 31.4% and 19.2% of the Company's legacy CRE whole loans were concentrated in retail, hotel and office, respectively, based on carrying value. Of these loans, 80.8% and 19.2% are within the Pacific and Mountain regions, respectively, as defined by NCREIF. At December 31, 201745.8%, 36.4% and 17.8% of the Company's legacy CRE whole loans were concentrated in retail, hotel and office, respectively, based on carrying value. Of these loans, 82.2% and 17.8% are within the Pacific and Mountain regions, respectively.
Except as previously discussed, all of the Company's CRE loans and its preferred equity investment were current with respect to contractual principal and interest at March 31, 2018.
Direct Financing Leases
The Company recorded no provision for lease losses against the value of its direct financing leases during the three months ended March 31, 2018. The Company recorded a $139,000 provision for lease losses during the three months ended March 31, 2017. The Company held $89,000 and $151,000 of direct financing leases, net of reserves, at March 31, 2018 and December 31, 2017, respectively.
Loan Portfolios Aging Analysis
The following table presents the loan portfolio aging analysis as of the dates indicated at amortized cost (in thousands, except amounts in footnotes):
 
30-59 Days
 
60-89 Days
 
Greater than 90 Days
 
Total Past Due
 
Current
 
Total Loans Receivable (1)
 
Total Loans > 90 Days and Accruing
At March 31, 2018:
 

 
 

 
 
 
 
 
 
 
 
 
 
Whole loans (2)
$

 
$

 
$
7,000

 
$
7,000

 
$
1,355,520

 
$
1,362,520

 
$

Preferred equity investment

 

 

 

 
19,008

 
19,008

 

Legacy CRE whole loans (3)

 

 
47,057

 
47,057

 
16,825

 
63,882

 
11,516

Total loans
$

 
$

 
$
54,057

 
$
54,057

 
$
1,391,353

 
$
1,445,410

 
$
11,516

 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2017:
 

 
 

 
 

 
 

 
 

 
 

 
 

Whole loans (2)
$

 
$

 
$
7,000

 
$
7,000

 
$
1,283,150

 
$
1,290,150

 
$

Legacy CRE whole loans (3)
11,516

 

 
11,000

 
22,516

 
41,267

 
63,783

 

Total loans
$
11,516

 
$

 
$
18,000

 
$
29,516

 
$
1,324,417

 
$
1,353,933

 
$

(1)
Excludes direct financing leases of $89,000 and $151,000, net of reserves, at March 31, 2018 and December 31, 2017, respectively.
(2)
Includes one CRE whole loan, with an amortized cost of $7.0 million, that was in default at March 31, 2018 and December 31, 2017.
(3)
Includes three and two legacy CRE whole loans that were in default with total carrying values of $40.5 million and $22.5 million at March 31, 2018 and December 31, 2017, respectively.

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24

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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2018
(unaudited)

Impaired Loans
The following tables show impaired loans as of the dates indicated (in thousands):
 
Recorded Balance
 
Unpaid Principal Balance
 
Specific Allowance
 
Average Investment in Impaired Loans
 
Interest Income Recognized
At March 31, 2018:
 
 
 
 
 
 
 
 
 
Loans without a specific valuation allowance:
 
 
 
 
 
 
 
 
 
Whole loans
$

 
$

 
$

 
$

 
$

Loans with a specific valuation allowance:
 
 
 
 
 
 
 
 
 
Whole loans
$
7,000

 
$
7,000

 
$
(2,500
)
 
$
7,000

 
$

Total:
 

 
 

 
 

 
 

 
 

Whole loans
$
7,000

 
$
7,000

 
$
(2,500
)
 
$
7,000

 
$

 
 
 
 
 
 
 
 
 
 
At December 31, 2017:
 

 
 

 
 

 
 

 
 

Loans without a specific valuation allowance:
 

 
 

 
 

 
 

 
 

Whole loans
$

 
$

 
$

 
$

 
$

Loans with a specific valuation allowance:
 

 
 

 
 

 
 

 
 

Whole loans
$
7,000

 
$
7,000

 
$
(2,500
)
 
$
7,000

 
$

Total:
 

 
 

 
 

 
 

 
 

Whole loans
$
7,000

 
$
7,000

 
$
(2,500
)
 
$
7,000

 
$

Troubled-Debt Restructurings ("TDR")
There were no TDRs for the three months ended March 31, 2018 and 2017.
 
 
 
 
 
 
 
 
 
 
 
 
NOTE 7 - INVESTMENT SECURITIES, TRADING
Structured notes are CLO debt securities collateralized by syndicated corporate loans. The following table summarizes the Company's structured notes classified as investment securities, trading and carried at fair value (in thousands, except number of securities):
 
 
Number of Securities
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
At March 31, 2018:
 
 
 
 
 
 
 
 
 
 
Structured notes
 
2
 
$
1,218

 
$

 
$
(1,054
)
 
$
164

 
 
 
 
 
 
 
 
 
 
 
At December 31, 2017:
 
 
 
 

 
 

 
 

 
 

Structured notes
 
4
 
$
2,891

 
$

 
$
(2,713
)
 
$
178

The Company sold two and one investment securities resulting in realized losses totaling $5,000 and a realized gain of $9,000, respectively, during the three months ended March 31, 2018 and 2017, respectively.

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25

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RESOURCE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2018
(unaudited)

NOTE 8 - INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The following table summarizes the Company's investment securities available-for-sale, including those pledged as collateral. ABS may include, but are not limited to, the Company's investments in securities backed by syndicated corporate loans and other loan obligations. Investment securities available-for-sale are carried at fair value (in thousands, except amounts in the footnote):
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses