Edgar Filing: NEW YORK MORTGAGE TRUST INC

nymt_10q-033112.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

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 001-32216

NEW YORK MORTGAGE TRUST, INC.

(Exact Name of Registrant as Specified in Its Charter)

Maryland	47-0934168
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

52 Vanderbilt Avenue, Suite 403, New York, New York 10017

(Address of Principal Executive Office) (Zip Code)

(212) 792-0107

(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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o

Accelerated Filer o

Non-Accelerated Filer o

Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

The number of shares of the registrant’s common stock, par value $.01 per share, outstanding on May 2, 2012 was 14,175,494.

NEW YORK MORTGAGE TRUST, INC.

FORM 10-Q

PART I. Financial Information	2
Item 1. Condensed Consolidated Financial Statements	2
Condensed Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and December 31, 2011	2
Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011	3
Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and 2011	4
Unaudited Condensed Consolidated Statement of Equity for the Three Months Ended March 31, 2012	5
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011	6
Unaudited Notes to the Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3. Quantitative and Qualitative Disclosures about Market Risk	58
Item 4. Controls and Procedures	62
PART II. OTHER INFORMATION	62
Item 1A. Risk Factors	62
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 5. Other Information	63
Item 6. Exhibits	63
SIGNATURES	64

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands)

	March 31,			December 31,
	2012			2011
ASSETS	(unaudited)


Investment securities available for sale, at fair value (including pledged securities of $145,153 and $129,942, respectively)	$	182,022		$	200,342
Residential mortgage loans held in securitization trusts (net)		200,809			206,920
Multi-family mortgage loans held in securitization trust, at fair value		1,155,183			-
Derivative assets		244,915			208,218
Mortgage loans held for investment		4,323			5,118
Investment in limited partnership		5,123			8,703
Cash and cash equivalents		8,875			16,586
Receivable for securities sold		-			1,133
Receivables and other assets		40,199			35,685
Total Assets	$	1,841,449		$	682,705

LIABILITIES AND EQUITY
Liabilities:
Financing arrangements, portfolio investments	$	118,385		$	112,674
Residential collateralized debt obligations		194,765			199,762
Multi-family collateralized debt obligations, at fair value		1,130,851			-
Derivative liabilities		3,064			2,619
Payable for securities purchased		245,294			228,300
Accrued expenses and other liabilities		11,054			8,043
Subordinated debentures		45,000			45,000
Total liabilities		1,748,413			596,398

Commitments and Contingencies
Equity:
Stockholders' equity
Common stock, $0.01 par value, 400,000,000 authorized, 14,175,494 and 13,938,273, shares issued and outstanding, respectively		142			139
Additional paid-in capital		150,221			153,710
Accumulated other comprehensive income		15,617			11,292
Accumulated deficit		(74,024	)		(79,863	)
Total stockholders' equity		91,956			85,278
Noncontrolling interest		1,080			1,029
Total equity		93,036			86,307
Total Liabilities and Equity	$	1,841,449		$	682,705

See notes to condensed consolidated financial statements.

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollar amounts in thousands, except per share data)

(unaudited)

	For the Three Months
	Ended March 31,
	2012			2011


INTEREST INCOME:
Investment securities and other	$	5,547		$	2,264
Multi-family loans held in securitization trust		12,200			-
Residential loans held in securitization trusts		1,344			1,430
Total interest income		19,091			3,694

INTEREST EXPENSE:
Investment securities and other		452			339
Multi-family collateralized debt obligations		11,574			-
Residential collateralized debt obligations		359			379
Subordinated debentures		499			466
Total interest expense		12,884			1,184

NET INTEREST INCOME		6,207			2,510

OTHER INCOME (EXPENSE):
Provision for loan losses		(230	)		(633	)
Income from investment in limited partnership		370			784
Realized gain on investment securities and related hedges, net		1,069			2,191
Unrealized loss on investment securities and related hedges, net		(872	)		(40	)
Unrealized gain on multi-family loans held in securitization trust		2,023			-
Total other income		2,360			2,302

General, administrative and other expenses		2,668			2,293
Total general, administrative and other expenses		2,668			2,293

INCOME FROM CONTINUING OPERATIONS		5,899			2,519
Loss from discontinued operation - net of tax		(9	)		(5	)
NET INCOME		5,890			2,514
Net income attributable to noncontrolling interest		51			-
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	5,839		$	2,514

Basic income per common share	$	0.42		$	0.27
Diluted income per common share	$	0.42		$	0.27
Dividends declared per common share	$	0.25		$	0.18
Weighted average shares outstanding-basic		13,998			9,433
Weighted average shares outstanding-diluted		13,998			9,433

See notes to condensed consolidated financial statements.

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollar amounts in thousands)

(unaudited)

	For the Three Months
	Ended March 31,
	2012		2011


NET INCOME	$	5,839	$	2,514

OTHER COMPREHENSIVE INCOME

Increase in net unrealized gain on available for sale securities		4,214		3,450
Reclassification adjustment for net gain included in net income		-		(1,868	)
Increase in fair value of derivative instruments utilized for cash flow hedges		111		260

OTHER COMPREHENSIVE INCOME		4,325		1,842

COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	10,164	$	4,356

See notes to condensed consolidated financial statements.

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(Dollar amounts in thousands)

(unaudited)

	Common Stock		Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Income		Non- controlling Interest		Total
Balance, December 31, 2011	$	139	$	153,710		$	(79,863	)	$	11,292	$	1,029	$	86,307
Net income		-		-			5,839			-		51		5,890
Stock issuance, net		3		55			-			-		-		58
Dividends declared		-		(3,544	)		-			-		-		(3,544	)
Increase in net unrealized gain on available for sale securities		-		-			-			4,214		-		4,214
Increase in fair value of derivative instruments utilized for cash flow hedges		-		-			-			111		-		111
Balance, March 31, 2012	$	142	$	150,221		$	(74,024	)	$	15,617	$	1,080	$	93,036

See notes to condensed consolidated financial statements.

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

(unaudited)

	For the Three Months Ended
	March 31,
	2012			2011
Cash Flows from Operating Activities:
Net income	$	5,890		$	2,514
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		31			34
Net amortization (accretion)		2,278			(1,107	)
Realized gain on securities and related hedges, net		(1,069	)		(2,191	)
Unrealized loss on securities and related hedges, net		872			40
Unrealized gain of loans held in multi-family securitization trust		(2,023	)		-
Net decrease in loans held for sale		11			7
Provision for loan losses		230			633
Income from investment in limited partnership		(370	)		(784	)
Interest distributions from investment in limited partnership		154			203
Stock issuance, net		58			68
Changes in operating assets and liabilities:
Receivables and other assets		(4,180	)		(616	)
Accrued expenses and other liabilities		4,346			(108	)
Net cash provided by (used in) operating activities		6,228			(1,307	)

Cash Flows from Investing Activities:
Restricted cash		568			(10,745	)
Purchases of reverse repurchase agreements		-			(40,252	)
Purchases of investment securities		(7,980	)		(30,399	)
Proceeds from sales of investment securities		1,201			48,888
Proceeds from mortgage loans held for investment		796			5,002
Proceeds from investment in limited partnership		3,796			2,597
Net receipts on other derivative instruments settled during the period		3,574			-
Principal repayments received on mortgage loans held in securitization trusts		8,228			4,453
Principal paydowns on investment securities - available for sale		4,986			6,340
Purchases of loans held in multi-family securitization trust		(21,682	)		-
Net cash used in investing activities		(6,513	)		(14,116	)

Cash Flows from Financing Activities:
Proceeds from financing arrangements		5,711			10,931
Dividends paid		(4,878	)		(1,697	)
Payments made on collateralized debt obligations		(8,259	)		(4,750	)
Net cash (used in) provided by financing activities		(7,426	)		4,484
Net Decrease in Cash and Cash Equivalents		(7,711	)		(10,939	)
Cash and Cash Equivalents - Beginning of Period		16,586			19,375
Cash and Cash Equivalents - End of Period	$	8,875		$	8,436

Supplemental Disclosure:
Cash paid for interest	$	1,164		$	1,113

Non-Cash Investment Activities:
Sale of investment securities not yet settled	$	-		$	45,750
Purchase of investment securities not yet settled	$	245,294		$	17,450
Consolidation of multi-family mortgage loans held in securitization trusts (net)	$	1,139,573		$	-
Consolidation of multi-family collateralized debt obligations	$	1,117,891		$	-

Non-Cash Financing Activities:
Dividends declared to be paid in subsequent period	$	3,544		$	1,700

See notes to condensed consolidated financial statements.

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

1. Summary of Significant Accounting Policies

Organization – New York Mortgage Trust, Inc., together with its consolidated subsidiaries (“NYMT,” the “Company,” “we,” “our” and “us”), is a real estate investment trust, or REIT, in the business of acquiring, investing in, financing and managing primarily mortgage-related assets and, to a lesser extent, financial assets. Our objective is to manage a portfolio of investments that will deliver stable distributions to our stockholders over diverse economic conditions. We intend to achieve this objective through a combination of net interest margin and net realized capital gains from our investment portfolio. Our portfolio includes investments sourced from distressed markets in recent years that create the potential for capital gains, as well as more traditional types of mortgage-related investments, such as Agency RMBS consisting of adjustable-rate and hybrid adjustable-rate RMBS, which we sometimes refer to as Agency ARMs, and Agency RMBS comprised of IOs, which we sometimes refer to as Agency IOs, that generate interest income.

The Company conducts its business through the parent company, NYMT, and several subsidiaries, including special purpose subsidiaries established for loan securitization purposes, taxable REIT subsidiaries ("TRSs") and qualified REIT subsidiaries ("QRSs"). The Company conducts certain of its portfolio investment operations through one of its wholly-owned TRSs, Hypotheca Capital, LLC (“HC”), in order to utilize, to the extent permitted by law, a portion of a net operating loss carry-forward held in HC that resulted from the Company's exit from the mortgage lending business. Prior to March 31, 2007, the Company conducted substantially all of its mortgage lending business through HC. The Company utilizes one of its wholly-owned QRSs, RB Commercial Mortgage LLC (“RBCM”), for its investments in multi-family CMBS assets, and, to a lesser extent, other commercial real estate-related debt investments. The Company utilizes another of its wholly-owned QRSs, NYMT-Midway LLC, and one of its wholly-owned TRSs, New York Mortgage Funding, LLC (“NYMF”), for its Agency IO portfolio managed by The Midway Group, L.P. (“Midway”). The Company consolidates all of its subsidiaries under generally accepted accounting principles in the United States of America (“GAAP”).

The Company is organized and conducts its operations to qualify as a REIT for federal income tax purposes. As such, the Company will generally not be subject to federal income tax on that portion of its income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by the due date of its federal income tax return and complies with various other requirements.

Basis of Presentation – The condensed consolidated balance sheet as of December 31, 2011 has been derived from audited financial statements. The condensed consolidated balance sheet at March 31, 2012, the condensed consolidated statements of operations for the three months ended March 31, 2012 and 2011, the condensed consolidated statements of comprehensive income for the three months ended March 31, 2012 and 2011, the condensed consolidated statement of equity for the three months ended March 31, 2012 and the condensed consolidated statements of cash flows for the three months ended March 31, 2012 and 2011 are unaudited. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with Article 10 of Regulation S-X and the instructions to Form 10-Q. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the operating results for the full year.

The accompanying condensed consolidated financial statements have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The condensed consolidated financial statements of the Company include the accounts of all subsidiaries; significant intercompany accounts and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the current period presentation.

Variable Interest Entities – An entity is referred to as a variable interest entity (“VIE”) if it meets at least one of the following criteria: (1) the entity has equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support of other parties; or (2) as a group, the holders of the equity investment at risk lack (a) the power to direct the activities of an entity that most significantly impact the entity’s economic performance; (b) the obligation to absorb the expected losses; or (c) the right to receive the expected residual returns; or (3) have disproportional voting rights and the entity’s activities are conducted on behalf of the investor that has disproportionally few voting rights.

The Company consolidates a VIE when it has both the power to direct the activities that most significantly impact the economic performance of the VIE and a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE. The Company is required to reconsider its evaluation of whether to consolidate a VIE each reporting period, based upon changes in the facts and circumstances pertaining to the VIE.

Investment Securities Available for Sale – The Company's investment securities, where the fair value option has not been elected and which are reported at fair value with unrealized gains and losses reported in other comprehensive income (“OCI”), include residential mortgage-backed securities (“RMBS”) that are issued by government sponsored enterprises (“GSE”), which, together with RMBS issued or guaranteed by government agencies, is referred to as “Agency RMBS,” non-Agency RMBS, collateralized loan obligations (“CLOs”) and multi-family commercial mortgage-backed securities (“CMBS”). Our investment securities are classified as available for sale securities. Realized gains and losses recorded on the sale of investment securities available for sale are based on the specific identification method and included in realized gain (loss) on sale of securities and related hedges in the condensed consolidated statements of operations. Purchase premiums or discounts on investment securities are amortized or accreted to interest income over the estimated life of the investment securities using the effective yield method. Adjustments to amortization are made for actual prepayment activity.

When the fair value of an investment security is less than its amortized cost at the balance sheet date, the security is considered impaired. The Company assesses its impaired securities on at least a quarterly basis, and designates such impairments as either “temporary” or “other-than-temporary.” If the Company intends to sell an impaired security, or it is more likely than not that it will be required to sell the impaired security before its anticipated recovery, then it must recognize an other-than-temporary impairment through earnings equal to the entire difference between the investment’s amortized cost and its fair value at the balance sheet date. If the Company does not expect to sell an other-than-temporarily impaired security, only the portion of the other-than-temporary impairment related to credit losses is recognized through earnings with the remainder recognized as a component of other comprehensive income (loss) on the condensed consolidated balance sheet. Impairments recognized through other comprehensive income (loss) do not impact earnings. Following the recognition of an other-than-temporary impairment through earnings, a new cost basis is established for the security, which may not be adjusted for subsequent recoveries in fair value through earnings. However, other-than-temporary impairments recognized through earnings may be accreted back to the amortized cost basis of the security on a prospective basis through interest income. The determination as to whether an other-than-temporary impairment exists and, if so, the amount considered other-than-temporarily impaired is subjective, as such determinations are based on both factual and subjective information available at the time of assessment. As a result, the timing and amount of other-than-temporary impairments constitute material estimates that are susceptible to significant change.

The Company’s investment securities available for sale also includes its investment in a wholly owned account referred to as our Agency IO portfolio. These investments primarily include interest only and inverse interest only securities (collectively referred to as “IOs”) that represent the right to the interest component of the cash flow from a pool of mortgage loans that are guaranteed or issued by a GSE or government agency. The Agency IO portfolio investments include derivative investments not designated as hedging instruments for accounting purposes, with unrealized gains and losses recognized through earnings in the condensed consolidated statements of operations. The Company has elected the fair value option for these investment securities which also measures unrealized gains and losses through earnings in the condensed consolidated statements of operations, as the Company believes this accounting treatment more accurately and consistently reflects their results of operations.

Residential Mortgage Loans Held in Securitization Trusts – Residential mortgage loans held in securitization trusts are certain adjustable rate mortgage ("ARM") loans transferred to New York Mortgage Trust 2005-1, New York Mortgage Trust 2005-2 and New York Mortgage Trust 2005-3 that have been securitized into sequentially rated classes of beneficial interests. The Company accounted for these securitization trusts as financings which are consolidated into the financial statements. Residential mortgage loans held in securitization trusts are carried at their unpaid principal balances, net of unamortized premium or discount, unamortized loan origination costs and allowance for loan losses.

Interest income is accrued and recognized as revenue when earned according to the terms of the mortgage loans and when, in the opinion of management, it is collectible. The accrual of interest on loans is discontinued when, in management’s opinion, the interest is not collectible in the normal course of business, but in no case when payment becomes greater than 90 days delinquent. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.

Allowance for Loan Losses on Residential Mortgage Loans Held in Securitization Trusts – We establish an allowance for loan losses based on management's judgment and estimate of credit losses inherent in our portfolio of residential mortgage loans held in securitization trusts.

Estimation involves the consideration of various credit-related factors including but not limited to, macro-economic conditions, the current housing market conditions, loan-to-value ratios, delinquency status, historical credit loss severity rates, purchased mortgage insurance, the borrower's current economic condition and other factors deemed to warrant consideration. Additionally, we look at the balance of any delinquent loan and compare that to the current value of the collateralizing property. We utilize various home valuation methodologies including appraisals, broker pricing opinions (“BPOs”), internet-based property data services to review comparable properties in the same area or consult with a realtor in the property's area.

Comparing the current loan balance to the property value determines the current loan-to-value (“LTV”) ratio of the loan. Generally, we estimate that a first lien loan on a property that goes into a foreclosure process and becomes real estate owned (“REO”), results in the property being disposed of at approximately 84% of the current value. This estimate is based on management's experience as well as realized severity rates since issuance of our securitizations. This base provision for a particular loan may be adjusted if we are aware of specific circumstances that may affect the outcome of the loss mitigation process for that loan. However, we predominantly use the base reserve number for our reserve. If real estate markets continue to decline, we may adjust our anticipated realization percentage.

Multi-Family Mortgage Loans Held in Securitization Trust – Multi-family mortgage loans held in securitization trust consist of a Freddie Mac Multi-Family Loan Securitization Series 2011-K03 (the “K-03 Series”) that is backed by approximately 62 multi-family properties. On December 30, 2011, the Company had acquired 100% of the privately placed first loss security of the K-03 Series in the secondary market for approximately $21.7 million. Based on a number of factors, including our acquisition on January 4, 2012 of a 7.5% ownership interest in RiverBanc, LLC (“RiverBanc”), an external manager to the Company, and certain servicing rights for the K-03 Series, we determined that we were the primary beneficiary of the K-03 Series and have consolidated the K-03 Series and related debt, interest income and expense in our financial statements as of January 4, 2012. The Company has elected the fair value option on the assets and liabilities held within the K-03 Series, which requires that changes in valuations in the assets and liabilities of the K-03 Series will be reflected in the Company's statement of operations.

Allowance for Loan Losses on Multi-Family Mortgage Loans Held in Securitization Trust – We establish an allowance for loan losses based on management's judgment and estimate of credit losses inherent in our portfolio of multi-family mortgage loans held in securitization trust.

Mortgage Loans Held for Investment – Mortgage loans held for investment are stated at unpaid principal balance, adjusted for any unamortized premium or discount, deferred fees or expenses, net of valuation allowances. Interest income is accrued on the principal amount of the loan based on the loan’s contractual interest rate. Amortization of premiums and discounts is recorded using the effective yield method. Interest income, amortization of premiums and discounts and prepayment fees are reported in interest income. Loans are considered to be impaired when it is probable that based upon current information and events, the Company will be unable to collect all amounts due under the contractual terms of the loan agreement. Based on the facts and circumstances of the individual loans being impaired, loan specific valuation allowances are established for the excess carrying value of the loan over either: (i) the present value of expected future cash flows discounted at the loan’s original effective interest rate, (ii) the estimated fair value of the loan’s underlying collateral if the loan is in the process of foreclosure or otherwise collateral dependent, or (iii) the loan’s observable market price.

Investment in Limited Partnership – The Company has an equity investment in a limited partnership and a limited liability company. In circumstances where the Company has a non-controlling interest but either owns a significant interest or is able to exert influence over the affairs of the enterprise, the Company utilizes the equity method of accounting. Under the equity method of accounting, the initial investment is increased each period for additional capital contributions and a proportionate share of the entity’s earnings and decreased for cash distributions and a proportionate share of the entity’s losses. Where the Company is not required to fund an investment’s losses, the Company does not continue to record its proportionate share of the entity’s losses such that its investment balance would go below zero.

Management periodically reviews its investments for impairment based on projected cash flows from the entity over the holding period. When any impairment is identified, the investments are written down to recoverable amounts.

Cash and Cash Equivalents – Cash and cash equivalents include cash on hand, amounts due from banks and overnight deposits. The Company maintains its cash and cash equivalents in highly rated financial institutions, and at times these balances exceed insurable amounts.

Receivables and Other Assets – Receivables and other assets include restricted cash held by third parties of $25.2 million which includes $11.6 million held in our Agency IO portfolio to be used for trading purposes and $13.4 million held by counterparties as collateral for hedging instruments at March 31, 2012.

Financing Arrangements, Portfolio Investments – Investment securities available for sale are typically financed with repurchase agreements, a form of collateralized borrowing which is secured by the securities on the balance sheet. Such financings are recorded at their outstanding principal balance with any accrued interest due recorded as an accrued expense.

Residential Collateralized Debt Obligations (“Residential CDOs”) – We use Residential CDOs to permanently finance our residential mortgage loans held in securitization trusts. For financial reporting purposes, the ARM loans held as collateral are recorded as assets of the Company and the Residential CDO is recorded as the Company’s debt. The Company has completed four securitizations since inception, the first three were accounted for as a permanent financing and the fourth was accounted for as a sale and accordingly, not included in the Company’s financial statements.

Multi-Family Collateralized Debt Obligations (“Multi-Family CDOs”) – We consolidated the K-03 Series and related debt, referred to as Multi-Family CDOs, in our financial statements. The Multi-Family CDOs permanently finance our multi-family mortgage loans held in securitization trust. For financial reporting purposes, the loans held as collateral are recorded as assets of the Company and the Multi-family CDO is recorded as the Company’s debt. We refer to both the Residential CDOs and Multi-Family CDOs as CDOs in this report.

Subordinated Debentures – Subordinated debentures are trust preferred securities that are fully guaranteed by the Company with respect to distributions and amounts payable upon liquidation, redemption or repayment. These securities are classified as subordinated debentures in the liability section of the Company’s condensed consolidated balance sheet.

Derivative Financial Instruments – The Company has developed risk management programs and processes, which include investments in derivative financial instruments designed to manage interest rate and prepayment risk associated with its securities investment activities.

Derivative instruments contain an element of risk in the event that the counterparties may be unable to meet the terms of such agreements. The Company minimizes its risk exposure by limiting the counterparties with which it enters into contracts to banks and investment banks who meet established credit and capital guidelines.

The Company invests in To-Be-Announced securities (“TBAs”) through its Agency IO portfolio. TBAs are forward-settling purchases and sales of Agency RMBS where the underlying pools of mortgage loans are “To-Be-Announced.” Pursuant to these TBA transactions, we agree to purchase or sell, for future settlement, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. For TBA contracts that we have entered into, we have not asserted that physical settlement is probable, therefore we have not designated these forward commitments as hedging instruments. Realized and unrealized gains and losses associated with these TBAs are recognized through earnings in the condensed consolidated statements of operations.

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instruments in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change.

For instruments that are not designated or qualify as a cash flow hedge, such as our use of U.S. Treasury securities or Eurodollar futures contracts, any realized and unrealized gains and losses associated with these instruments are recognized through earnings in the condensed consolidated statement of operations.

Termination of Hedging Relationships – The Company employs risk management monitoring procedures to ensure that the designated hedging relationships are demonstrating, and are expected to continue to demonstrate, a high level of effectiveness. Hedge accounting is discontinued on a prospective basis if it is determined that the hedging relationship is no longer highly effective or expected to be highly effective in offsetting changes in fair value of the hedged item.

Additionally, the Company may elect to un-designate a hedge relationship during an interim period and re-designate upon the rebalancing of a hedge profile and the corresponding hedge relationship. When hedge accounting is discontinued, the Company continues to carry the derivative instruments at fair value with changes recorded in current earnings.

Revenue Recognition – Interest income on our investment securities and on our mortgage loans is accrued based on the outstanding principal balance and their contractual terms. Premiums and discounts associated with investment securities and mortgage loans at the time of purchase or origination are amortized into interest income over the life of such securities using the effective yield method. Adjustments to premium amortization are made for actual prepayment activity.

Interest income on our credit sensitive securities, such as our non-Agency RMBS and certain of our CMBS that were purchased at a discount to par value, is recognized based on the security’s effective interest rate. The effective interest rate on these securities is based on management’s estimate from each security of the projected cash flows, which are estimated based on the Company’s assumptions related to fluctuations in interest rates, prepayment speeds and the timing and amount of credit losses. On at least a quarterly basis, the Company reviews and, if appropriate, makes adjustments to its cash flow projections based on input and analysis received from external sources, internal models, and its judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Changes in cash flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in the yield/interest income recognized on these securities.

Based on the projected cash flows from the Company’s first loss CMBS POs purchased at a discount to par value, a portion of the purchase discount is designated as non-accretable purchase discount or credit reserve, which effectively mitigates the Company’s risk of loss on the mortgages collateralizing such CMBS and is not expected to be accreted into interest income. The amount designated as a credit reserve may be adjusted over time, based on the actual performance of the security, its underlying collateral, actual and projected cash flow from such collateral, economic conditions and other factors. If the performance of a security with a credit reserve is more favorable than forecasted, a portion of the amount designated as credit reserve may be accreted into interest income over time. Conversely, if the performance of a security with a credit reserve is less favorable than forecasted, the amount designated as credit reserve may be increased, or impairment charges and write-downs of such securities to a new cost basis could result.

With respect to interest rate swaps that have not been designated as hedges, any net payments under, or fluctuations in the fair value of, such swaps will be recognized in current earnings.

Other Comprehensive Income (Loss) – Other comprehensive income (loss) is comprised primarily of income (loss) from changes in value of the Company’s available for sale securities, and the impact of deferred gains or losses on changes in the fair value of derivative contracts hedging future cash flows.

Employee Benefits Plans – The Company sponsors a defined contribution plan (the “Plan”) for all eligible domestic employees. The Plan qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. The Company made no contributions to the Plan for the three months ended March 31, 2012 and 2011.

Stock Based Compensation – Compensation expense for equity based awards and stock issued for services are recognized over the vesting period of such awards and services, based upon the fair value of the stock at the grant date.

Income Taxes – The Company operates so as to qualify as a REIT under the requirements of the Internal Revenue Code. Requirements for qualification as a REIT include various restrictions on ownership of the Company’s stock, requirements concerning distribution of taxable income and certain restrictions on the nature of assets and sources of income. A REIT must distribute at least 90% of its taxable income to its stockholders of which 85% plus any undistributed amounts from the prior year must be distributed within the taxable year in order to avoid the imposition of an excise tax. Distribution of the remaining balance may extend until timely filing of the Company’s tax return in the subsequent taxable year. Qualifying distributions of taxable income are deductible by a REIT in computing taxable income.

HC and NYMF are TRSs and therefore subject to federal and state income taxes. 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 base upon the change in tax status. 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.

Accounting Standards Codification Topic 740 Accounting for Income Taxes (“ASC 740”) provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. In situations involving uncertain tax positions related to income tax matters, we do not recognize benefits unless it is more likely than not that they will be sustained. ASC 740 was applied to all open taxable years as of the effective date. Management’s determinations regarding ASC 740 may be subject to review and adjustment at a later date based on factors including, but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof. The Company will recognize interest and penalties, if any, related to uncertain tax positions as income tax expense.

Earnings Per Share – Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.

A Summary of Recent Accounting Pronouncements Follows:

Transfers and Servicing (ASC 860)

In April 2011, the FASB issued ASU No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements. ASU 2011-03 is intended to improve financial reporting of repurchase agreements (“repos”) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. In a typical repo transaction, an entity transfers financial assets to a counterparty in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in the future. FASB Accounting Standards Codification (“Codification”) Topic 860, Transfers and Servicing, prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repo agreements. That determination is based, in part, on whether the entity has maintained effective control over the transferred financial assets. The amendments to the Codification in this ASU are intended to improve the accounting for these transactions by removing from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets. The guidance in the ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of ASU 2011-03 did not have an effect on our financial condition, results of operations and disclosures.

Fair Value Measurements (ASC 820)

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 represents the converged guidance of the FASB and the IASB (the “Boards”) on fair value measurements. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and IFRS. The amendments in this ASU are required to be applied prospectively, and are effective for interim and annual periods beginning after December 15, 2011. The adoption of ASU 2011-04 did not affect our financial condition or results of operations but required us to add additional disclosures.

Balance Sheet (ASC 210)

In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities. The update requires new disclosures about balance sheet offsetting and related arrangements. For derivatives and financial assets and liabilities, the amendments require disclosure of gross asset and liability amounts, amounts offset on the balance sheet, and amounts subject to the offsetting requirements but not offset on the balance sheet. The guidance is effective January 1, 2013 and is to be applied retrospectively. The adoption of ASU 2011-11 will have an effect on our disclosures but we do not expect the adoption to have an effect on our financial condition or results of operations.

2. Investment Securities Available For Sale

Investment securities available for sale consist of the following as of March 31, 2012 (dollar amounts in thousands):

	Amortized Costs		Unrealized Gains		Unrealized Losses		Carrying Value
Agency RMBS	$	136,956	$	2,521	$	(8,337)	$	131,140
CMBS		21,080		493		(632)		20,941
Non-Agency RMBS		4,548		—		(996)		3,552
CLOs		10,942		15,447		—		26,389
Total	$	173,526	$	18,461	$	(9,965)	$	182,022

Included in investment securities available for sale are our Agency IOs. Agency IOs are measured at fair value through earnings and consist of the following as of March 31, 2012 (dollar amounts in thousands):

	Amortized Costs		Unrealized Gains		Unrealized Losses		Carrying Value
Interest only securities included in Agency RMBS:
Federal National Mortgage Association (“Fannie Mae”)	$	30,628	$	416	$	(3,980)	$	27,064
Federal Home Loan Mortgage Corporation (“Freddie Mac”)		19,565		116		(2,262)		17,419
Government National Mortgage Association (“Ginnie Mae”)		23,784		438		(2,040)		22,182
Total	$	73,977	$	970	$	(8,282)	$	66,665

Investment securities available for sale consist of the following as of December 31, 2011 (dollar amounts in thousands):

	Amortized Costs		Unrealized Gains		Unrealized Losses		Carrying Value
Agency RMBS	$	139,639	$	2,327	$	(9,509)	$	132,457
CMBS		42,221		128		(1,164)		41,185
Non-Agency RMBS		5,156		—		(1,211)		3,945
CLOs		10,262		12,493		—		22,755
Total	$	197,278	$	14,948	$	(11,884)	$	200,342

Included in investment securities available for sale are our Agency IOs. Agency IOs are measured at fair value through earnings and consist of the following as of December 31, 2011 (dollar amounts in thousands):

	Amortized Costs		Unrealized Gains		Unrealized Losses		Carrying Value
Interest only securities included in Agency RMBS:
Fannie Mae	$	31,079	$	490	$	(3,908)	$	27,661
Freddie Mac		19,477		142		(2,554)		17,065
Ginnie Mae		21,656		304		(3,004)		18,956
Total	$	72,212	$	936	$	(9,466)	$	63,682

During the three months ended March 31, 2012, the Company received total proceeds of approximately $1.2 million, realizing approximately $1.1 million of loss from the sale of investment securities available for sale. During the three months ended March 31, 2011, the Company received total proceeds of approximately $7.0 million, realizing approximately $2.2 million of profit before incentive fee to Harvest Capital Strategies LLC (“HCS”), from the sale of investment securities available for sale.

Actual maturities of our available for sale securities are generally shorter than stated contractual maturities (which range up to 30 years), as they are affected by the contractual lives of the underlying mortgages, periodic payments and prepayments of principal. As of March 31, 2012 and December 31, 2011, the weighted average life of the Company’s available for sale securities portfolio was approximately 4.42 and 5.24 years.

The following tables set forth the stated reset periods of our investment securities available for sale at March 31, 2012 (dollar amounts in thousands):

March 31, 2012	Less than 6 Months		More than 6 Months To 24 Months		More than 24 Months		Total

	Carrying Value		Carrying Value		Carrying Value		Carrying Value
Agency RMBS	$	67,955	$	36,900	$	26,285	$	131,140
CMBS		—		—		20,941		20,941
Non-Agency RMBS		3,552		—		—		3,552
CLO		26,389		—		—		26,389
Total	$	97,896	$	36,900	$	47,226	$	182,022

The following tables set forth the stated reset periods of our investment securities available for sale at December 31, 2011 (dollar amounts in thousands):

December 31, 2011	Less than 6 Months		More than 6 Months To 24 Months		More than 24 Months		Total

	Carrying Value		Carrying Value		Carrying Value		Carrying Value
Agency RMBS	$	74,983	$	29,210	$	28,264	$	132,457
CMBS		—		—		41,185		41,185
Non-Agency RMBS		3,945		—		—		3,945
CLO		22,755		—		—		22,755
Total	$	101,683	$	29,210	$	69,449	$	200,342

The following table presents the Company's investment securities available for sale in an unrealized loss position reported through OCI, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2012 and December 31, 2011, respectively (dollar amounts in thousands):

March 31, 2012	Less than 12 Months				Greater than 12 months				Total
	Carrying Value		Gross Unrealized Losses		Carrying Value		Gross Unrealized Losses		Carrying Value		Gross Unrealized Losses
Agency RMBS	$	20,308	$	55	$	—	$	—	$	20,308	$	55
CMBS		14,451		632		—		—		14,451		632
Non-Agency RMBS		—		—		3,553		996		3,553		996
Total	$	34,759	$	687	$	3,553	$	996	$	38,312	$	1,683

December 31, 2011	Less than 12 Months				Greater than 12 months				Total
	Carrying Value		Gross Unrealized Losses		Carrying Value		Gross Unrealized Losses		Carrying Value		Gross Unrealized Losses
Agency RMBS	$	13,718	$	43	$	—	$	—	$	13,718	$	43
CMBS		13,396		1,164		—		—		13,396		1,164
Non-Agency RMBS		—		—		3,944		1,211		3,944		1,211
Total	$	27,114	$	1,207	$	3,944	$	1,211	$	31,058	$	2,418

For the three months ended March 31, 2012, the Company did not have unrealized losses in investment securities that were deemed other-than-temporary. For the year ended December 31, 2011, the Company recognized a $0.3 million other-than-temporary impairment through earnings.

3. Residential Mortgage Loans Held in Securitization Trusts and Real Estate Owned

Residential mortgage loans held in securitization trusts (net) consist of the following at March 31, 2012 and December 31, 2011, respectively (dollar amounts in thousands):

	March 31, 2012			December 31, 2011
Mortgage loans principal amount	$	202,503		$	208,934
Deferred origination costs – net		1,285			1,317
Reserve for loan losses		(2,979	)		(3,331	)
Total	$	200,809		$	206,920

Allowance for Loan losses - The following table presents the activity in the Company's allowance for loan losses on residential mortgage loans held in securitization trusts for the three months ended March 31, 2012 and 2011, respectively (dollar amounts in thousands):

	Three Months Ended March 31,
	2012		2011
Balance at beginning of period	$	3,331	$	2,589
Provisions for loan losses		210		425
Transfer to real estate owned		(435)		—
Charge-offs		(127)		(434)
Balance at the end of period	$	2,979	$	2,580

On an ongoing basis, the Company evaluates the adequacy of its allowance for loan losses. The Company’s allowance for loan losses at March 31, 2012 was $3.0 million, representing 147 basis points of the outstanding principal balance of residential loans held in securitization trusts as of March 31, 2012, as compared to 159 basis points as of December 31, 2011. As part of the Company’s allowance for loan adequacy analysis, management will assess an overall level of allowances while also assessing credit losses inherent in each non-performing residential mortgage loan held in securitization trusts. These estimates involve the consideration of various credit related factors, including but not limited to, current housing market conditions, current loan to value ratios, delinquency status, borrower’s current economic and credit status and other relevant factors.

Real Estate Owned – The following table presents the activity in the Company’s real estate owned held in residential securitization trusts for the three months ended March 31, 2012 and the year ended December 31, 2011, respectively (dollar amounts in thousands):

	March 31, 2012			December 31, 2011
Balance at beginning of period	$	454		$	740
Write downs		(20	)		(87	)
Transfer from mortgage loans held in securitization trusts		883			698
Disposal		—			(897	)
Balance at the end of period	$	1,317		$	454

Real estate owned held in residential securitization trusts are included in receivables and other assets on the balance sheet and write downs are included in provision for loan losses in the statement of operations for reporting purposes.

All of the Company’s mortgage loans and real estate owned held in residential securitization trusts are pledged as collateral for the Residential CDOs issued by the Company. As of March 31, 2012 and December 31, 2011, the Company’s net investment in the residential securitization trusts, which is the maximum amount of the Company’s investment that is at risk to loss and represents the difference between the carrying amount of the loans and real estate owned held in residential securitization trusts and the amount of Residential CDOs outstanding, was $7.4 million and $7.6 million, respectively.

Delinquency Status of Our Residential Mortgage Loans Held in Securitization Trusts

As of March 31, 2012, we had 37 delinquent loans with an aggregate principal amount outstanding of approximately $20.1 million categorized as Residential Mortgage Loans Held in Securitization Trusts (net). Of the $20.1 million in delinquent loans, $15.8 million, or 79%, are currently under some form of modified payment plan. The table below shows delinquencies in our portfolio of residential mortgage loans held in securitization trusts, including real estate owned through foreclosure (REO), as of March 31, 2012 (dollar amounts in thousands):

March 31, 2012

Days Late	Number of Delinquent Loans		Total Dollar Amount		% of Loan Portfolio
30-60		3	$	1,096		0.54	%
61-90		1	$	254		0.12	%
90+		33	$	18,733		9.16	%
Real estate owned through foreclosure		5	$	1,973		0.96	%

As of December 31, 2011, we had 38 delinquent loans with an aggregate principal amount outstanding of approximately $21.0 million categorized as Residential Mortgage Loans Held in Securitization Trusts (net). Of the $21.0 million in delinquent loans, $18.0 million, or 86%, are currently under some form of modified payment plan. The table below shows delinquencies in our portfolio of residential mortgage loans held in securitization trusts, including real estate owned through foreclosure (REO), as of December 31, 2011 (dollar amounts in thousands):

December 31, 2011

Days Late	Number of Delinquent Loans		Total Dollar Amount		% of Loan Portfolio
30-60		2	$	517		0.25	%
61-90		1	$	378		0.18	%
90+		35	$	20,138		9.61	%
Real estate owned through foreclosure		3	$	656		0.31	%

4. Multi-Family Mortgage Loans Held in Securitization Trust

On December 30, 2011, the Company had acquired 100% of the privately placed first loss security of the K-03 Series in the secondary market for approximately $21.7 million, which was accounted for as an available for sale investment security at December 31, 2011. Based on a number of factors, including our acquisition on January 4, 2012 of a 7.5% ownership interest in RiverBanc, an external manager to the Company, and certain servicing rights for the K-03 Series, we determined that we were the primary beneficiary of the K-03 Series and have consolidated the K-03 Series and related debt, interest income and expense in our financial statements as of January 4, 2012. The Company does not have any claims to the assets (other than the security represented by our first loss piece) or obligations for the liabilities of the K-03 Series. The Company has elected the fair value option on the assets and liabilities held within the K-03 Series, which requires that changes in valuations in the assets and liabilities of the K-03 Series will be reflected in the Company's statement of operations. The Company recorded an unrealized gain of $2.0 million on the multi-family loans and CDO debt within the securitization trust.

Net assets and liabilities of the K-03 Series, recorded at fair value at January 4, 2012 consists of the following (dollar amounts in thousands):

Multi-family mortgage loans held in securitization trust (net)	$	1,139,573
Receivables		5,097
Multi-family collateralized debt obligations		(1,117,891	)
Accrued expenses		(5,097	)
Net Investment	$	21,682

The condensed balance sheet of the consolidated K-03 Series at March 31, 2012 is as follows (dollar amounts in thousands):

	March 31,
Assets	2012
Multi-family mortgage loans held in securitization trust	$	1,155,183
Receivables		5,097
Total Assets	$	1,160,280

Liabilities & Equity
Multi-family collateralized debt obligations	$	1,130,851
Accrued expenses		5,097
Equity		24,332
Total Liabilities & Equity	$	1,160,280

The condensed statement of operations of the consolidated K-03 Series for the three months ended March 31, 2012 is as follows (dollar amounts in thousands):

Statement of Operations	Three Months Ended March 31, 2012
Interest income	$	12,200
Interest expense		11,574
Net interest income		626
Unrealized gain on multi-family loans held in securitization trust		2,023
Net Income	$	2,649

5. Variable Interest Entities

The Company has evaluated its real estate debt investments to determine whether they are a VIE. As of March 31, 2012 and December 31, 2011, the Company identified interests in four entities which were determined to be VIEs. Based on management’s analysis, the Company is not the primary beneficiary of two and three of the identified VIEs, at March 31, 2012 and December 31, 2011, respectively, since it (i) does not have the power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) does not have 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, these VIEs are not consolidated into the Company’s financial statements as of March 31, 2012 and December 31, 2011.

As of March 31, 2012, the Company’s two identified variable interests in a VIE that are not consolidated are investment securities with a fair value of $20.9 million, which is our maximum exposure to loss. As of December 31, 2011, the Company’s three identified variable interests in a VIE that are not consolidated are investment securities with a fair value of $41.2 million, which is our maximum exposure to loss. The Company has accounted for these investment securities as available for sale securities at fair value, with unrealized gains and losses reported in OCI. The investment securities consist primarily of first loss principal only strips from Freddie Mac Multi-Family K-Series CMBS securitizations.

The Company has identified two entities that it has determined that it has a variable interest in a VIE and for which it is the primary beneficiary and has a controlling financial interest. One entity is an investment in a limited liability company that has provided a loan to a borrower that is secured by commercial property. The loan is for $2.5 million and the limited liability company has been consolidated into the Company’s financial statements. The loan was paid off on April 5, 2012. The other entity consists of multi-family mortgage loans held in a securitization trust that the Company consolidated during the three months ended March 31, 2012. On December 30, 2011, the Company had acquired 100% of the privately placed first loss security of the K-03 Series in the secondary market for approximately $21.7 million. Based on a number of factors, including our acquisition on January 4, 2012 of a 7.5% ownership interest in RiverBanc, an external manager to the Company, and certain servicing rights for the K-03 Series, we determined that we were the primary beneficiary of the K-03 Series and have consolidated the K-03 Series and related debt, interest income and expense in our financial statements as of January 4, 2012. The K-03 Series consists of multi-family mortgage loans held in a securitization trust and Multi-Family CDOs in the amount of $1.2 billion and $1.1 billion at March 31, 2012, respectively. The Company does not have any claims to the assets (other than the security represented by our first loss piece) or obligations to the liabilities of the K-03 Series. The Company’s maximum exposure to loss from the K-03 Series is its carrying value of $24.3 million as of March 31, 2012, which represents the Company's investment in the K-03 Series.

6. Investment in Limited Partnership

The Company has a non-controlling, unconsolidated limited partnership interest in an entity that is accounted for using the equity method of accounting. Capital contributions, distributions, and profits and losses of the entity are allocated in accordance with the terms of the limited partnership agreement. The Company owns 100% of the equity of the limited partnership, but has no decision-making powers, and therefore does not consolidate the limited partnership. Our maximum exposure to loss in this variable interest entity is $5.0 million and $8.5 million at March 31, 2012 and December 31, 2011, respectively. During the third and fourth quarters of 2010, HC invested, in exchange for limited partnership interests, $19.4 million in this limited partnership that was formed for the purpose of acquiring, servicing, selling or otherwise disposing of first-lien residential mortgage loans. The pool of mortgage loans was acquired by the partnership at a significant discount to the loans’ unpaid principal balance.

At March 31, 2012 and December 31, 2011, the Company had an investment in this limited partnership of $5.1 million and $8.7 million, respectively. For the three months ended March 31, 2012 and 2011, the Company recognized income from the investment in limited partnership of $0.4 million and $0.8 million, respectively. For the three months ended March 31, 2012 and 2011, the Company received distributions from the investment in limited partnership of $4.0 million and $2.8 million, respectively.

The condensed balance sheets of the investment in limited partnership at March 31, 2012 and December 31, 2011, respectively, are as follows (dollar amounts in thousands):

	March 31,		December 31,
Assets	2012		2011
Cash	$	1,083	$	1,154
Mortgage loans held for sale (net)		3,993		6,918
Other assets		97		661
Total Assets	$	5,173	$	8,733

Liabilities & Partners’ Equity
Other liabilities	$	141	$	206
Partners’ equity		5,032		8,527
Total Liabilities & Partners’ Equity	$	5,173	$	8,733

The condensed statements of operations of the investment in limited partnership for the three months ended March 31, 2012 and 2011, respectively, are as follows (dollar amounts in thousands):

	Three Months Ended March 31,
Statement of Operations	2012			2011
Interest income	$	218		$	408
Realized gain		273			606
Total Income		491			1,014
Other expenses		(121	)		(230	)
Net Income	$	370		$	784

7. Derivative Instruments and Hedging Activities

The Company enters into derivative instruments to manage its interest rate risk exposure. These derivative instruments include interest rate swaps and futures. The Company may also purchase or short TBAs and U.S. Treasury securities, purchase put or call options on U.S. Treasury futures or invest in other types of mortgage derivative securities.

The following table presents the fair value of derivative instruments held in our Agency IO portfolio that were not designated as hedging instruments and their location in the Company’s condensed consolidated balance sheets at March 31, 2012 and December 31, 2011, respectively (dollar amounts in thousands):

Derivatives Not Designated as Hedging Instruments	Balance Sheet Location	March 31, 2012		December 31, 2011
TBA securities	Derivative assets	$	244,057	$	207,891
Options on U.S. Treasury futures	Derivative assets		141		327
U.S. Treasury futures	Derivative assets		717		—
U.S. Treasury futures	Derivative liabilities		—		566
Eurodollar futures	Derivative liabilities		2,871		1,749

The tables below summarize the activity of derivative instruments not designated as hedges for the three months ended March 31, 2012 and 2011, respectively (dollar amounts in thousands):

	Notional Amount For the Three Months Ended March 31, 2012
Derivatives Not Designated as Hedging Instruments	December 31, 2011			Additions		Settlement, Expiration or Exercise			March 31, 2012
TBA securities	$	202,000		$	295,000	$	(260,000	)	$	237,000
U.S. Treasury futures		(92,800	)		242,200		(297,500	)		(148,100	)
Short sales of Eurodollar futures		(2,422,000	)		277,000		(327,000	)		(2,472,000	)
Options on U.S. Treasury futures		199,500			327,000		(391,500	)		135,000

	Notional Amount For the Three Months Ended March 31, 2011
Derivatives Not Designated as Hedging Instruments	December 31, 2010		Additions		Settlement, Expiration or Exercise			March 31, 2011
TBA securities	$	—	$	8,000	$	(2,000	)	$	6,000
U.S. Treasury futures		—		22,000		(99,000	)		(77,000	)

The TBAs in our Agency IO portfolio are accounted for at fair value with both realized and unrealized gains and losses included in other income (expense) in our condensed consolidated statements of operations. The use of TBAs exposes the Company to market value risk, as the market value of the securities that the Company is required to purchase pursuant to a TBA transaction may decline below the agreed-upon purchase price. Conversely, the market value of the securities that the Company is required to sell pursuant to a TBA transaction may increase above the agreed upon sale price. For the three months ended March 31, 2012, we recorded net realized gains of $3.3 million and unrealized losses of $2.3 million. For the three months ended March 31, 2011, we recorded realized losses of $938 and unrealized losses of $66,000. At March 31, 2012 our condensed consolidated balance sheet includes TBA-related liabilities of $245.3 million included in payable for securities purchased. Open TBA purchases and sales involving the same counterparty, same underlying deliverable and the same settlement date are reflected in our consolidated financial statements on a net basis.

The Eurodollar futures in our Agency IO portfolio are accounted for at fair value with both realized and unrealized gains and losses included in other income (expense) in our condensed consolidated statements of operations. For the three months ended March 31, 2012, we recorded net realized losses of $41,000 and net unrealized losses of $1.1 million in our Eurodollar futures contracts. The Eurodollar futures consist of 2,472 contracts with expiration dates ranging between June 2012 and September 2014. There were no realized or unrealized gains or losses from Eurodollars for the same period in 2011.

The U.S. Treasury futures and options in our Agency IO portfolio are accounted for at fair value with both realized and unrealized gains and losses included in other income (expense) in our condensed consolidated statements of operations. For the three months ended March 31, 2012, we recorded net realized losses of $1.1 million and unrealized gains of $1.3 million. There were no realized or unrealized gains or losses from U.S. Treasury futures and options for the same period in 2011.

The following table presents the fair value of derivative instruments designated as hedging instruments and their location in the Company’s condensed consolidated balance sheets at March 31, 2012 and December 31, 2011, respectively (dollar amounts in thousands):

Derivatives Designated as Hedging Instruments		Balance Sheet Location		March 31, 2012				December 31, 2011
Interest Rate Swaps		Derivative liabilities		$	193			$	304

The following table presents the impact of the Company’s derivative instruments on the Company’s accumulated other comprehensive income (loss) for the three months ended March 31, 2012 and 2011, respectively (dollar amounts in thousands):

	Three Months Ended March 31,
Derivatives Designated as Hedging Instruments	2012			2011
Accumulated other comprehensive income (loss) for derivative instruments:
Balance at beginning of the period	$	(304	)	$	(1,087	)
Unrealized gain on interest rate swaps		111			260
Balance at end of the period	$	(193	)	$	(827	)

The Company estimates that over the next 12 months, approximately $0.2 million of the net unrealized losses on the interest rate swaps will be reclassified from accumulated other comprehensive income (loss) into earnings.

The following table details the impact of the Company’s interest rate swaps included in interest expense for the three months ended March 31, 2012 and 2011, respectively (dollar amounts in thousands):

	Three Months Ended March 31,
	2012		2011
Interest Rate Swaps:
Interest expense-investment securities	$	128	$	280

The Company’s interest rate swaps are designated as cash flow hedges against the benchmark interest rate risk associated with its short term repurchase agreements. There were no costs incurred at the inception of our interest rate swaps, under which the Company agrees to pay a fixed rate of interest and receive a variable interest rate based on one month LIBOR, on the notional amount of the interest rate swaps. The Company’s interest rate swap notional amounts are based on an amortizing schedule fixed at the start date of the transaction.

The Company documents its risk-management policies, including objectives and strategies, as they relate to its hedging activities, and upon entering into hedging transactions, documents the relationship between the hedging instrument and the hedged liability contemporaneously. The Company assesses, both at inception of a hedge and on an on-going basis, whether or not the hedge is “highly effective” when using the matched term basis.

The Company discontinues hedge accounting on a prospective basis and recognizes changes in the fair value through earnings when: (i) it is determined that the derivative is no longer effective in offsetting cash flows of a hedged item (including forecasted transactions); (ii) it is no longer probable that the forecasted transaction will occur; or (iii) it is determined that designating the derivative as a hedge is no longer appropriate. The Company’s derivative instruments are carried on the Company’s balance sheet at fair value, as assets, if their fair value is positive, or as liabilities, if their fair value is negative. For the Company’s derivative instruments that are designated as “cash flow hedges,” changes in their fair value are recorded in accumulated other comprehensive income (loss), provided that the hedges are effective. A change in fair value for any ineffective amount of the Company’s derivative instruments would be recognized in earnings. The Company has not recognized any change in the value of its existing derivative instruments designated as cash flow hedges through earnings as a result of ineffectiveness of any of its hedges.

The following table presents information about the Company’s interest rate swaps as of March 31, 2012 and December 31, 2011, respectively (dollar amounts in thousands):

	March 31, 2012					December 31, 2011
Maturity (1)	Notional Amount		Weighted Average Fixed Pay Interest Rate			Notional Amount		Weighted Average Fixed Pay Interest Rate
Within 30 Days	$	130		2.93	%	$	14,930		3.02	%
Over 30 days to 3 months		250		2.93			260		2.93
Over 3 months to 6 months		370		2.93			380		2.93
Over 6 months to 12 months		8,820		2.93			810		2.93
Over 12 months to 24 months		—					8,380		2.93
Total	$	9,570		2.93	%	$	24,760		2.99	%

(1)	The Company enters into scheduled amortizing interest rate swap transactions whereby the Company pays a fixed rate of interest and receives one month LIBOR.

Interest Rate Swaps, Futures Contracts and TBAs - The use of interest rate swaps (“Swaps”) exposes the Company to counterparty credit risks in the event of a default by a Swap counterparty. If a counterparty defaults under the applicable Swap agreement, the Company may be unable to collect payments to which it is entitled under its Swap agreements, and may have difficulty collecting the assets it pledged as collateral against such Swaps. The Company currently has in place with all outstanding Swap counterparties bi-lateral margin agreements thereby requiring a party to post collateral to the Company for any valuation deficit. This arrangement is intended to limit the Company’s exposure to losses in the event of a counterparty default.

The Company is required to pledge assets under a bi-lateral margin arrangement, including either cash or Agency RMBS, as collateral for its interest rate swaps, futures contracts and TBAs, whose collateral requirements vary by counterparty and change over time based on the market value, notional amount, and remaining term of the agreement. In the event the Company is unable to meet a margin call under one of its agreements, thereby causing an event of default or triggering an early termination event under one of its agreements, the counterparty to such agreement may have the option to terminate all of such counterparty’s outstanding transactions with the Company. In addition, under this scenario, any close-out amount due to the counterparty upon termination of the counterparty’s transactions would be immediately payable by the Company pursuant to the applicable agreement. The Company believes it was in compliance with all margin requirements under its agreements as of March 31, 2012 and December 31, 2011. The Company had $13.4 million and $9.1 million of restricted cash related to margin posted for its agreements as of March 31, 2012 and December 31, 2011, respectively. The restricted cash held by third parties is included in receivables and other assets in the accompanying condensed consolidated balance sheets.

8. Financing Arrangements, Portfolio Investments

The Company has entered into repurchase agreements with third party financial institutions to finance its investment portfolio. The repurchase agreements are short-term borrowings that bear interest rates typically based on a spread to LIBOR, and are secured by the securities which they finance. At March 31, 2012, the Company had repurchase agreements with an outstanding balance of $118.4 million and a weighted average interest rate of 1.30%. As of December 31, 2011, the Company had repurchase agreements with an outstanding balance of $112.7 million and a weighted average interest rate of 0.71%. At March 31, 2012 and December 31, 2011, securities pledged by the Company as collateral for repurchase agreements had estimated fair values of $145.2 million and $129.9 million, respectively. All outstanding borrowings under our repurchase agreements mature within 30 days. As of March 31, 2012, the average days to maturity for all repurchase agreements are 18 days.

The follow table summarizes outstanding repurchase agreement borrowings secured by portfolio investments as of March 31, 2012 and December 31, 2011, respectively (dollar amounts in thousands):

Repurchase Agreements by Counterparty

Counterparty Name	March 31, 2012		December 31, 2011
Cantor Fitzgerald, L.P.	$	11,460	$	9,225
Credit Suisse First Boston LLC		10,420		11,147
Jefferies & Company, Inc.		28,382		18,380
JPMorgan Chase & Co.		45,344		49,226
South Street Securities LLC		22,779		24,696
Total Financing Arrangements, Portfolio Investments	$	118,385	$	112,674

As of March 31, 2012, the outstanding balance under our repurchase agreements was funded at an advance rate of 84% that implies an average haircut of 16%. The weighted average “haircut” related to our repurchase agreement financing for our other Agency RMBS, Agency IOs, CLOs and CMBS was approximately 6%, 25%, 35% and 20%, respectively, for a total weighted average “haircut” of 16%. The amount at risk for Credit Suisse First Boston LLC, South Street Securities LLC, Jefferies & Company, Inc., Cantor Fitzgerald, L.P., and JPMorgan Chase & Co. are $0.8 million, $1.0 million, $5.8 million, $5.8 million and $13.4 million, respectively.

In the event we are unable to obtain sufficient short-term financing through repurchase agreements or otherwise, or our lenders start to require additional collateral, we may have to liquidate our investment securities at a disadvantageous time, which could result in losses. Any losses resulting from the disposition of our investment securities in this manner could have a material adverse effect on our operating results and net profitability.

As of March 31, 2012, the Company had $8.9 million in cash and $36.9 million in unencumbered investment securities to meet additional haircut or market valuation requirements, including $17.0 million of RMBS, of which $13.4 million are Agency RMBS. The $8.9 million of cash and the $17.0 million in RMBS (which, collectively, represents 22% of our financing arrangements, portfolio investments) are liquid and could be monetized to pay down or collateralize the liability immediately. There is also an additional $11.6 million held in overnight deposits in our Agency IO portfolio included in restricted cash that is available to meet margin calls as it relates to our Agency IO portfolio repurchase agreements.

9. Residential Collateralized Debt Obligations

The Company’s Residential CDOs, which are recorded as liabilities on the Company’s balance sheet, are secured by ARM loans pledged as collateral, which are recorded as assets of the Company. As of March 31, 2012 and December 31, 2011, the Company had Residential CDOs outstanding of $194.8 million and $199.8 million, respectively. As of March 31, 2012 and December 31, 2011, the current weighted average interest rate on these CDOs was 0.62% and 0.68%, respectively. The Residential CDOs are collateralized by ARM loans with a principal balance of $202.5 million and $208.9 million at March 31, 2012 and December 31, 2011, respectively. The Company retained the owner trust certificates, or residual interest for three securitizations, and, as of March 31, 2012 and December 31, 2011, had a net investment in the residential securitizations trusts of $7.4 million and $7.6 million, respectively.

10. Multi-Family Collateralized Debt Obligations

The Company’s Multi-Family CDOs, which are recorded as liabilities on the Company’s balance sheet, are secured by multi-family mortgage loans pledged as collateral, which are recorded as assets of the Company. As of March 31, 2012, the Company had Multi-Family CDOs outstanding of $1.1 billion. As of March 31, 2012, the current weighted average interest rate on these CDOs was 5.41%. The Multi-Family CDOs are collateralized by multi-family mortgage loans with a principal balance of $1.2 billion at March 31, 2012. The Company had a net investment in the multi-family securitizations trust of $24.3 million.

11. Discontinued Operation

In connection with the sale of our mortgage origination platform assets during the quarter ended March 31, 2007, we classified our mortgage lending segment as a discontinued operation. As a result, we have reported revenues and expenses related to the segment as a discontinued operation for all periods presented in the accompanying condensed consolidated financial statements. Certain assets, such as the deferred tax asset, and certain liabilities, such as subordinated debentures and liabilities related to lease facilities not sold, are part of our ongoing operations and accordingly, we have not included these items as part of the discontinued operation. Assets and liabilities related to the discontinued operation are $4.0 million and $0.5 million, respectively, at each of March 31, 2012 and December 31, 2011, and are included in receivables and other assets and accrued expenses and other liabilities in the condensed consolidated balance sheets.

Statements of Operations Data

The statements of operations of the discontinued operation for the three months ended March 31, 2012 and 2011, respectively, are as follows (dollar amounts in thousands):

	Three Months Ended March 31,
	2012			2011
Revenues	$	37		$	44
Expenses		46			49
Loss from discontinued operations – net of tax	$	(9	)	$	(5	)

12. Commitments and Contingencies

Loans Sold to Third Parties – The Company sold its discontinued mortgage lending business in March 2007. In the normal course of business, the Company is obligated to repurchase loans based on violations of representations and warranties in the loan sale agreements. The Company did not repurchase any loans during the three months ended March 31, 2012. At March 31, 2012, the Company had a reserve of approximately $0.3 million.

Outstanding Litigation – The Company is at times subject to various legal proceedings arising in the ordinary course of business. As of March 31, 2012, the Company does not believe that any of its current legal proceedings, individually or in the aggregate, will have a material adverse effect on its operations, financial condition or cash flows.

13. Concentrations of Credit Risk

At March 31, 2012 and December 31, 2011, there were geographic concentrations of credit risk exceeding 5% of the total loan balances as follows:

	March 31,			December 31,
Residential mortgage loans held in securitization trusts and real estate owned held in residential securitization trusts:	2012			2011
New York		37.8	%		37.5	%
Massachusetts		25.1	%		24.6	%
New Jersey		9.1	%		9.2	%
Florida		5.0	%		5.7	%
Connecticut		5.0	%		5.1	%

	March 31,			December 31,
CMBS investments and multi-family mortgage loans held in securitization trust:	2012			2011
Texas		14.3	%		14.3	%
California		9.3	%		9.3	%
New York		7.2	%		7.2	%
Georgia		6.7	%		6.7	%
Washington		6.3	%		6.3	%
Florida		5.5	%		5.5	%

14. Fair Value of Financial Instruments

The Company has established and documented processes for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, then fair value is based upon internally developed models that primarily use inputs that are market-based or independently-sourced market parameters, including interest rate yield curves.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of valuation hierarchy are defined as follows:

Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following describes the valuation methodologies used for the Company’s financial instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Investment Securities Available for Sale (RMBS) – Fair value for the RMBS in our portfolio is based on quoted prices provided by dealers who make markets in similar financial instruments. The dealers will incorporate common market pricing methods, including a spread measurement to the Treasury curve or interest rate swap curve as well as underlying characteristics of the particular security including coupon, periodic and life caps, collateral type, rate reset period and seasoning or age of the security. If quoted prices for a security are not reasonably available from a dealer, the security will be re-classified as a Level 3 security and, as a result, management will determine the fair value based on characteristics of the security that the Company receives from the issuer and based on available market information. Management reviews all prices used in determining valuation to ensure they represent current market conditions. This review includes surveying similar market transactions, comparisons to interest pricing models as well as offerings of like securities by dealers. The Company's investment securities that are comprised of RMBS are valued based upon readily observable market parameters and are classified as Level 2 fair values.

Investment Securities Available for Sale (CMBS) – As the Company’s CMBS investments are comprised of securities for which there are not substantially similar securities that trade frequently, the Company classifies these securities as Level 3 fair values. Fair value of the Company’s CMBS investments is based on an internal valuation model that considers expected cash flows from the underlying loans and yields required by market participants. The significant unobservable inputs used in the measurement of these investments are projected losses of certain identified loans within the pool of loans and a discount rate. The discount rate used in determining fair value incorporates default rate, loss severity and current market interest rates. The discount rate ranges from 6.0% to 16.8%. Significant increases or decreases in these inputs would result in a significantly lower or higher fair value measurement. We also obtain quoted prices provided by dealers who make markets in similar financial instruments.

Multi-family mortgage loans held in securitization trust (net) – Multi-family mortgage loans held in the securitization trust are recorded at fair value and classified as Level 3 fair values. Fair value is based on an internal valuation model that considers expected cash flows from the underlying loans and yields required by market participants. The significant unobservable inputs used in the measurement of these investments are discount rates. The discount rate used in determining fair value incorporates default rate, loss severity and current market interest rates. The discount rate ranges from 3.8% to 6.8%. We also obtain quoted prices provided by dealers who make markets in similar financial instruments. Significant increases or decreases in these inputs would result in a significantly lower or higher fair value measurement.

Investment Securities Available for Sale (CLO) – The fair value of the CLO notes was based on quoted prices provided by dealers who make markets in similar financial instruments.

Investment Securities Available for Sale – The fair value of other investment securities available for sale, such as U.S. Treasury securities, are based on quoted prices provided by dealers who make markets in similar financial instruments and are typically classified as Level 2 fair values.

Derivative Instruments – The fair value of interest rate swaps, options and TBAs are based on dealer quotes. The fair value of futures are based on exchange-traded prices. The Company’s derivatives are classified as Level 1 and Level 2 fair values.

Multi-family collateralized debt obligations – The fair of multi-family collateralized debt obligations was based on contractual cash payments and yields expected by market participants. We also obtain quoted market prices provided by dealers who make markets in similar securities.

The following table presents the Company’s financial instruments measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011, respectively, on the Company’s condensed consolidated balance sheets (dollar amounts in thousands):

	Measured at Fair Value on a Recurring Basis at March 31, 2012
	Level 1		Level 2		Level 3		Total
Assets carried at fair value:
Investment securities available for sale:
Agency RMBS	$	—	$	131,140	$	—	$	131,140
CMBS		—		—		20,941		20,941
Non-Agency RMBS		—		3,552		—		3,552
CLO		—		26,389		—		26,389
Multi-family mortgage loans held in securitization trust		—		—		1,155,183		1,155,183
Derivative assets:
TBA securities		—		244,057		—		244,057
Options on U.S. Treasury futures		—		141		—		141
U.S. Treasury futures		717		—		—		717
Total	$	717	$	405,279	$	1,176,124	$	1,582,120

Liabilities carried at fair value:
Multi-family collateralized debt obligations	$	—	$	—	$	1,130,851	$	1,130,851
Derivative liabilities:
Interest rate swaps		—		193		—		193
Eurodollar futures		2,871		—		—		2,871
Total	$	2,871	$	193	$	1,130,851	$	1,133,915

	Measured at Fair Value on a Recurring Basis at December 31, 2011
	Level 1		Level 2		Level 3		Total
Assets carried at fair value:
Investment securities available for sale:
Agency RMBS	$	—	$	132,457	$	—	$	132,457
CMBS		—		—		41,185		41,185
Non-Agency RMBS		—		3,945		—		3,945
CLO		—		22,755		—		22,755
Derivative assets:
TBA securities		—		207,891		—		207,891
Options on U.S. Treasury futures		—		327		—		327
Total	$	—	$	367,375	$	41,185	$	408,560

Liabilities carried at fair value:
Derivative liabilities:
Interest rate swaps	$	—	$	304	$	—	$	304
U.S. Treasury futures		566		—		—		566
Eurodollar futures		1,749		—		—		1,749
Total	$	2,315	$	304	$	—	$	2,619

The following table details changes in valuation for the Level 3 assets for the three months ended March 31, 2012 and 2011, respectively (amounts in thousands):

Level 3 Assets:

	Three Months Ended March 31,
	2012			2011
Balance at beginning of period	$	41,185		$	—
Total gains (realized/unrealized)
Included in earnings (1)		19,240			—
Included in other comprehensive income		896			—
Purchases		—			—
Paydowns		(3,240	)		—
Transfers (2)		1,118,043			—
Balance at the end of period	$	1,176,124		$	—

(1) – Amounts included in interest income and unrealized gain.

(2) – Based on a number of factors, including our acquisition on January 4, 2012 of a 7.5% ownership interest in RiverBanc, an external manager to the Company, and certain servicing rights for the K-03 Series, we determined that we were the primary beneficiary of the K-03 Series and have consolidated the K-03 Series and related debt, interest income and expense in our financial statements as of January 4, 2012.

The following table details changes in valuation for the Level 3 liabilities for the three months ended March 31, 2012 and 2011, respectively (amounts in thousands):

Level 3 Liabilities:

	Three Months Ended March 31,
	2012			2011
Balance at beginning of period	$	—		$	—
Total gains (realized/unrealized)
Included in earnings (1)		16,200			—
Included in other comprehensive income		—			—
Purchases		—			—
Paydowns		(3,240	)		—
Transfers (2)		1,117,891			—
Balance at the end of period	$	1,130,851		$	—

(1) – Amounts included in interest expense and unrealized gain.

Any changes to the valuation methodology are reviewed by management to ensure the changes are appropriate. As markets and products develop and the pricing for certain products becomes more transparent, the Company continues to refine its valuation methodologies. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The Company uses inputs that are current as of each reporting date, which may include periods of market dislocation, during which time price transparency may be reduced. This condition could cause the Company’s financial instruments to be reclassified from Level 2 to Level 3 in future periods.

The following table presents assets measured at fair value on a non-recurring basis as of March 31, 2012 and December 31, 2011, respectively, on the condensed consolidated balance sheets (dollar amounts in thousands):

	Assets Measured at Fair Value on a Non-Recurring Basis at March 31, 2012
	Level 1			Level 2			Level 3			Total
Mortgage loans held for investment		$	—		$	—		$	4,323		$	4,323
Mortgage loans held for sale – included in discontinued operations (net)			—			—			3,769			3,769
Residential mortgage loans held in securitization trusts – impaired loans (net)			—			—			5,655			5,655
Real estate owned held in residential securitization trusts			—			—			1,317			1,317

	Assets Measured at Fair Value on a Non-Recurring Basis at December 31, 2011
	Level 1			Level 2			Level 3			Total
Mortgage loans held for investment		$	—		$	—		$	5,118		$	5,118
Mortgage loans held for sale – included in discontinued operations (net)			—			—			3,780			3,780
Residential mortgage loans held in securitization trusts – impaired loans (net)			—			—			6,518			6,518
Real estate owned held in residential securitization trusts			—			—			454			454

The following table presents losses incurred for assets measured at fair value on a non-recurring basis for the three months ended March 31, 2012 and 2011, respectively, on the Company’s condensed consolidated statements of operations (dollar amounts in thousands):

	Three Months Ended March 31,
	2012		2011
Residential mortgage loans held in securitization trusts – impaired loans (net)	$	210	$	405
Real estate owned held in residential securitization trusts		20		—

Mortgage Loans Held for Investment – The Company’s mortgage loans held for investment are recorded at amortized cost less specific loan loss reserves.

Mortgage Loans Held for Sale (net) – The fair value of mortgage loans held for sale (net) are estimated by the Company based on the price that would be received if the loans were sold as whole loans taking into consideration the aggregated characteristics of the loans such as, but not limited to, collateral type, index, interest rate, margin, length of fixed interest rate period, life time cap, periodic cap, underwriting standards, age and credit.

Residential Mortgage Loans Held in Securitization Trusts – Impaired Loans (net) – Impaired residential mortgage loans held in the securitization trusts are recorded at amortized cost less specific loan loss reserves. Impaired loan value is based on management’s estimate of the net realizable value taking into consideration local market conditions of the distressed property, updated appraisal values of the property and estimated expenses required to remediate the impaired loan.

Real Estate Owned Held in Residential Securitization Trusts – Real estate owned held in the residential securitization trusts are recorded at net realizable value. Any subsequent adjustment will result in the reduction in carrying value with the corresponding amount charged to earnings. Net realizable value based on an estimate of disposal taking into consideration local market conditions of the distressed property, updated appraisal values of the property and estimated expenses required to sell the property.

The following table presents the carrying value and estimated fair value of the Company’s financial instruments at March 31, 2012 December 31, 2011, respectively, (dollar amounts in thousands):

	March 31, 2012				December 31, 2011
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial Assets:
Cash and cash equivalents	$	8,875	$	8,875	$	16,586	$	16,586
Investment securities available for sale		182,022		182,022		200,342		200,342
Residential mortgage loans held in securitization trusts (net)		200,809		178,077		206,920		182,976
Multi-family mortgage loans held in securitization trust		1,155,183		1,155,183		—		—
Derivative assets		244,915		244,915		208,218		208,218
Assets related to discontinued operation-mortgage loans held for sale (net)		3,769		3,769		3,780		3,780
Mortgage loans held for investment		4,323		4,323		5,118		5,118
Receivable for securities sold		—		—		1,133		1,133

Financial Liabilities:
Financing arrangements, portfolio investments	$	118,385	$	118,385	$	112,674	$	112,674
Residential collateralized debt obligations		194,765		164,121		199,762		171,187
Multi-family collateralized debt obligations		1,130,851		1,130,851		—		—
Derivative liabilities		3,064		3,064		2,619		2,619
Payable for securities purchased		245,294		245,294		228,300		228,300
Subordinated debentures		45,000		34,423		45,000		26,318

In addition to the methodology to determine the fair value of the Company’s financial assets and liabilities reported at fair value on a recurring basis and non-recurring basis, as previously described, the following methods and assumptions were used by the Company in arriving at the fair value of the Company’s other financial instruments in the following table:

a. Cash and cash equivalents – Estimated fair value approximates the carrying value of such assets.

b. Residential mortgage loans held in securitization trusts (net) – Residential mortgage loans held in the securitization trusts are recorded at amortized cost. Fair value is estimated using pricing models and taking into consideration the aggregated characteristics of groups of loans such as, but not limited to, collateral type, index, interest rate, margin, length of fixed-rate period, life cap, periodic cap, underwriting standards, age and credit estimated using the estimated market prices for similar types of loans.

c. Receivable for securities sold – Estimated fair value approximates the carrying value of such assets.

d. Financing arrangements, portfolio investments – The fair value of these financing arrangements approximates cost as they are short term in nature and mature in 30 days.

e. Residential collateralized debt obligations – The fair value of these CDOs is based on discounted cash flows as well as market pricing on comparable obligations.

f. Payable for securities purchased – Estimated fair value approximates the carrying value of such liabilities.

g. Subordinated debentures – The fair value of these subordinated debentures is based on discounted cash flows using management’s estimate for market yields.

15. Capital Stock and Earnings per Share

The Company had 400,000,000 shares of common stock, par value $0.01 per share, authorized with 14,175,494 and 13,938,273 shares issued and outstanding as of March 31, 2012 and December 31, 2011, respectively. As of March 31, 2012 and December 31, 2011, the Company had 200,000,000 shares of preferred stock, par value $0.01 per share, authorized, with 0 shares issued and outstanding. Of the common stock authorized at March 31, 2012 and December 31, 2011, 1,131,751 shares and 1,154,992 shares, respectively, were reserved for issuance under the Company’s 2010 Stock Incentive Plan. The Company issued 237,221 shares of common stock and 17,095 shares of common stock during the three months ended March 31, 2012 and 2011, respectively.

The following table presents cash dividends declared by the Company on its common stock with respect to each of the quarterly periods commencing January 1, 2011 and ended March 31, 2012:

Period	Declaration Date	Record Date	Payment Date	Cash Dividend Per Share
First Quarter 2012	March 19, 2012	March 29, 2012	April 25, 2012	$	0.25
Fourth Quarter 2011	December 15, 2011	December 27, 2011	January 25, 2012		0.35	(1)
Third Quarter 2011	September 20, 2011	September 30, 2011	October 25, 2011		0.25
Second Quarter 2011