Lument Finance Trust, Inc. [LFT] Filings

10-Q 1 oaks-20230630.htm 10-Q oaks-20230630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ____________

Commission File No. 001-35845

LUMENT FINANCE TRUST, INC.

(Exact name of registrant as specified in its charter)


Maryland						45-4966519
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)


230 Park Avenue, 20th Floor, New York, New York						10169
(Address of principal executive offices)						(Zip code)

Registrant's Telephone Number, including area code (212) 317-5700

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class:

Trading Symbol(s)

Name of Exchange on Which Registered:

Common Stock, par value $0.01 per share

LFT

New York Stock Exchange

7.875% Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share

LFTPrA

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐			Accelerated Filer ☐
Non-accelerated Filer x			Smaller reporting company ☒
			Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.


Class						Outstanding at August 7, 2023
Common stock, $0.01 par value						52,231,152

LUMENT FINANCE TRUST, INC.

TABLE OF CONTENTS


PART I - Financial Information

Item 1.	Financial Statements
	Consolidated Balance Sheets as of June 30 , 2023 (unaudited) and December 31, 2022	1
	Consolidated Statements of Operations for the three and six months ended June 30 , 2023 (unaudited) and June 30 , 2022 (unaudited)	2
	Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2023 (unaudited) and June 30, 2022 (unaudited)	3
	Consolidated Statements of Cash Flows for the six months ended June 30 , 2023 (unaudited) and June 30 , 2022 (unaudited)	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures about Market Risks	38
Item 4.	Controls and Procedures	39

PART II - Other Information		39

Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	Mine Safety Disclosures	39
Item 5.	Other Information	39
Item 6.	Exhibits	40

Signatures		41

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Consolidated Balance Sheets


	June 30, 2023(1)		December 31, 2022(1)
	(unaudited)
ASSETS
Cash and cash equivalents	$	98,495,690	$	43,858,515
Restricted cash	1,274,046		3,507,850
Commercial mortgage loans held-for-investment, at amortized cost	1,021,042,905		1,076,148,186
Less: Allowance for credit losses	(3,897,895)		(4,258,668)
Commercial mortgage loans held-for-investment, net of allowance for credit losses	1,017,145,010		1,071,889,518
Mortgage servicing rights, at fair value	746,734		795,656
Accrued interest receivable	5,865,802		5,797,991

Other assets	2,490,187		2,116,007
Total assets	$	1,126,017,469	$	1,127,965,537

LIABILITIES AND EQUITY
LIABILITIES
Collateralized loan obligations, net	830,564,083		829,310,498
Secured term loan, net	47,094,610		46,971,042
Accrued interest payable	2,542,214		2,360,809
Dividends payable	4,131,369		4,131,369
Fees and expenses payable to Manager	1,660,250		1,606,333
Other liabilities(2)	933,748		583,989
Total liabilities	886,926,274		884,964,040

COMMITMENTS AND CONTINGENCIES (NOTES 10 & 11)

EQUITY
Preferred Stock: par value $0.01 per share; 50,000,000 shares authorized; 7.875% Series A Cumulative Redeemable, $60,000,000 aggregate liquidation preference, 2,400,000 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively	57,254,935		57,254,935
Common Stock: par value $0.01 per share; 450,000,000 shares authorized, 52,231,152 shares issued and outstanding, at June 30, 2023 and December 31, 2022, respectively	522,312		522,252
Additional paid-in capital	314,576,282		314,598,384
Cumulative distributions to stockholders	(169,362,164)		(160,724,426)
Accumulated earnings	36,000,330		31,250,852
Total stockholders' equity	238,991,695		242,901,997
Noncontrolling interests	$	99,500	$	99,500
Total equity	$	239,091,195	$	243,001,497

Total liabilities and equity	$	1,126,017,469	$	1,127,965,537

(1) Our consolidated balance sheets include assets and liabilities of consolidated variable interest entities ("VIEs") as the Company was the primary beneficiary of these VIEs. As of June 30, 2023 and December 31, 2022, assets of consolidated VIEs totaled $1,001,991,708 and $1,005,507,371, respectively and the liabilities of consolidated VIEs totaled $833,019,750 and $831,575,144 respectively. See Note 4 for further discussion.

(2) Includes $55,941 and $0 of Current Expected Credit Loss ("CECL") allowance related to unfunded commitments on commercial mortgage loans, net as of June 30, 2023 and December 31, 2022, respectively.

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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)


	Three Months Ended June 30, 2023		Three Months Ended June 30, 2022		Six Months Ended June 30, 2023		Six Months Ended June 30, 2022

Revenues:
Interest income:
Commercial mortgage loans held-for-investment	$	21,818,608	$	12,633,772	$	43,763,269	$	22,642,836
Cash and cash equivalents	827,443		4,912		1,089,108		9,767
Interest expense:
Collateralized loan obligations	(14,199,861)		(5,284,890)		(27,232,907)		(9,289,128)
Secured term loan	(937,210)		(937,210)		(1,864,122)		(1,859,853)
Net interest income	7,508,980		6,416,584		15,755,348		11,503,622
Other expense:
Provision for credit losses, net	(555,083)		(351,914)		(375,399)		(351,914)
Change in unrealized (loss) gain on mortgage servicing rights	206		81,216		(48,923)		228,598
Servicing income, net	45,396		56,053		96,924		123,234
Total other expense	(509,481)		(214,645)		(327,398)		(82)
Expenses:
Management and incentive fees	1,093,374		1,090,652		2,180,636		2,015,269
General and administrative expenses	882,723		960,420		1,830,789		1,813,152
Operating expenses reimbursable to Manager	577,666		648,645		1,087,652		1,039,355
Other operating expenses	1,809,700		77,808		1,874,284		153,998
Compensation expense	61,586		54,893		123,694		105,781
Total expenses	4,425,049		2,832,418		7,097,055		5,127,555
Net income before provision for income taxes	2,574,450		3,369,521		8,330,895		6,375,985
Benefit from (provision for) income taxes	(223)		(25,669)		10,023		(77,334)
Net income	2,574,227		3,343,852		8,340,918		6,298,651
Dividends accrued to preferred stockholders	(1,185,042)		(1,185,042)		(2,370,000)		(2,370,000)
Net income attributable to common stockholders	$	1,389,185	$	2,158,810	$	5,970,918	$	3,928,651
Earnings per share:
Net income attributable to common stockholders (basic and diluted)	$	1,389,185	$	2,158,810	$	5,970,918	$	3,928,651
Weighted average number of shares of common stock outstanding	52,231,152		52,226,141		52,231,152		44,389,086
Basic and diluted income per share	$	0.03	$	0.04	$	0.11	$	0.09
Dividends declared per share of common stock	$	0.06	$	0.06	$	0.12	$	0.12

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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Equity

(unaudited)


	Preferred Stock			Common Stock			Additional Paid-in Capital		Cumulative Distributions to Stockholders		Accumulated Earnings		Total Stockholders' Equity		Noncontrolling interests		Total Equity
	Shares	Value		Shares	Par Value
Balance at December 31, 2022	2,400,000	$	57,254,935	52,231,152	$	522,252	$	314,598,384	$	(160,724,426)	$	31,250,852	$	242,901,997	$	99,500	$	243,001,497

Cost of issuing common stock	—	—		—	—		(14,040)		—		—		$	(14,040)	—		$	(14,040)



Restricted stock compensation expense	—	—		—	—		3,358		—		—		$	3,358	—		$	3,358
Cumulative-effect adjustment upon adoption of ASU 2016-13 (Note 2)	—	—		—	—		—		—		(3,591,440)		$	(3,591,440)	—		$	(3,591,440)
Net income	—	—		—	—		—		—		5,766,691		$	5,766,691	—		$	5,766,691



Common stock dividends	—	—		—	—		—		(3,133,869)		—		$	(3,133,869)	—		$	(3,133,869)
Preferred stock dividends	—	—		—	—		—		(1,184,958)		—		(1,184,958)		—		$	(1,184,958)
Balance at March 31, 2023	2,400,000	$	57,254,935	52,231,152	$	522,252	$	314,587,702	$	(165,043,253)	$	33,426,103	$	240,747,739	$	99,500	$	240,847,239
Issuance of common stock	—	—		—	60		13,560		—		—		$	13,620	—		$	13,620
Cost of issuing common stock	—	—		—	—		(14,196)		—		—		$	(14,196)	—		$	(14,196)



Restricted stock compensation expense	—	—		—	—		(10,784)		—		—		$	(10,784)	—		$	(10,784)
Net income	—	—		—	—		—		—		2,574,227		$	2,574,227	—		$	2,574,227



Common stock dividends	—	—		—	—		—		(3,133,869)		—		$	(3,133,869)	—		$	(3,133,869)
Preferred stock dividends	—	—		—	—		—		(1,185,042)		—		$	(1,185,042)	—		$	(1,185,042)
Balance at June 30, 2023	2,400,000	$	57,254,935	52,231,152	$	522,312	$	314,576,282	$	(169,362,164)	$	36,000,330	$	238,991,695	$	99,500	$	239,091,195

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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Equity

(unaudited)


	Preferred Stock			Common Stock			Additional Paid-in Capital		Cumulative Distributions to Stockholders		Accumulated Earnings		Total Stockholders' Equity		Noncontrolling interests		Total Equity
	Shares	Value		Shares	Value
Balance at December 31, 2021	2,400,000	$	57,254,935	24,947,883	$	249,434	$	233,833,749	$	(143,449,310)	$	21,387,192	$	169,276,000	$	99,500	$	169,375,500
Issuance of common stock	—	—		27,277,269	272,773		83,195,670		—		—		83,468,443		—		83,468,443
Cost of issuing common stock	—	—		—	—		(2,404,070)		—		—		(2,404,070)		—		(2,404,070)
Restricted stock compensation expense	—	—		—	—		4,638		—		—		4,638		—		4,638
Net income	—	—		—	—		—		—		2,954,799		2,954,799		—		2,954,799
Common stock dividends	—	—		—	—		—		(3,133,509)		—		(3,133,509)		—		(3,133,509)
Preferred stock dividends	—	—		—	—		—		(1,184,958)		—		(1,184,958)		—		(1,184,958)
Balance at March 31, 2022	2,400,000	$	57,254,935	52,225,152	$	522,207	$	314,629,987	$	(147,767,777)	$	24,341,991	$	248,981,343	$	99,500	$	249,080,843
Issuance of common stock	—	—		6,000	45		18,765		—		—		$	18,810	—		$	18,810
Cost of issuing common stock	—	—		—	—		(14,196)		—		—		$	(14,196)	—		$	(14,196)

Restricted stock compensation expense	—	—		—	—		(14,334)		—		—		$	(14,334)	—		$	(14,334)
Net income	—	—		—	—		—		—		3,343,852		$	3,343,852	—		$	3,343,852
Common stock dividends	—	—		—	—		—		(3,133,869)		—		$	(3,133,869)	—		$	(3,133,869)
Preferred stock dividends	—	—		—	—		—		(1,185,042)		—		$	(1,185,042)	—		$	(1,185,042)
Balance at June 30, 2022	2,400,000	$	57,254,935	52,231,152	$	522,252	$	314,620,222	$	(152,086,688)	$	27,685,843	$	247,996,564	$	99,500	$	248,096,064

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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)


	Six Months Ended June 30, 2023		Six Months Ended June 30, 2022

Cash flows from operating activities:
Net income	$	8,340,918	$	6,298,651
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of commercial mortgage loans held-for-investment discounts	(1,196)		(125,098)
Amortization of commercial mortgage loans held-for-investment premiums	10,687		50,522
Accretion of deferred loan fees	(129,300)		—

Amortization of deferred offering costs	(28,236)		(85,867)
Amortization of deferred financing costs	1,377,153		1,372,887
Provision for credit losses, net	375,399		351,914

Unrealized loss (gain) on mortgage servicing rights	48,923		(228,598)
Restricted stock compensation expense	6,194		9,114
Net change in:
Accrued interest receivable	(67,811)		388,565

Other assets	(374,179)		(262,488)
Accrued interest payable	181,405		404,480
Fees and expenses payable to Manager	53,917		(78,327)
Other liabilities	293,818		199,679
Net cash provided by operating activities	10,087,692		8,295,434
Cash flows from investing activities:
Purchase of commercial mortgage loans held-for-investment	(72,630,053)		(222,142,167)
Principal payments from commercial mortgage loans held-for-investment	123,583,470		171,007,115


Net cash provided by (used in) investing activities	50,953,417		(51,135,052)
Cash flows from financing activities:
Proceeds from issuance of common stock	—		81,136,045




Payment of deferred financing costs	—		(119,375)
Dividends paid on common stock	(6,267,738)		(5,378,818)
Dividends paid on preferred stock	(2,370,000)		(2,370,000)
Net cash (used in) provided by financing activities	(8,637,738)		73,267,852
Net increase in cash, cash equivalents and restricted cash	52,403,371		30,428,234
Cash, cash equivalents and restricted cash, beginning of period	47,366,365		18,279,052
Cash, cash equivalents and restricted cash, end of period	$	99,769,736	$	48,707,286


Supplemental disclosure of cash flow information
Cash paid for interest	$	27,538,470	$	9,371,614


Non-cash investing and financing activities information
Dividends declared but not paid at end of period	$	4,315,119	$	4,131,369

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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2023

NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS

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

The Company was incorporated on March 28, 2012 and commenced operations on May 16, 2012. The Company began trading as a publicly traded company on March 22, 2013.

The Company has elected to be taxed as a real estate investment trust ("REIT") and to comply with Sections 856 through 859 of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, the Company generally will not be subject to U.S. federal income tax to the extent of its distributions to stockholders and as long as certain asset, income and share ownership tests are met.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited consolidated financial statements and related notes have been prepared in accordance with GAAP for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures normally included in the financial statements prepared under GAAP have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company's financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These consolidated financial statements should be read in conjunction with the Company's financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the Securities and Exchange Commission ('SEC") on March 23, 2023.

Principles of Consolidation

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

Use of Estimates

The financial statements have been prepared on the accrual basis of accounting in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires the Company to make a number of significant estimates. These include estimates of fair value of certain assets and liabilities, amount and timing of credit losses, prepayment rates, and other estimates that affect the reported amounts of certain assets and liabilities as of the date of the financial statements and the reported amounts of certain revenues and expenses during the reported period. It is likely that changes in these estimates (e.g. valuation changes due to supply and demand, credit performance, prepayments, interest rates, or other reasons) will occur in the near term. The Company's estimates are inherently subjective in nature and actual results could differ from its estimates and the differences may be material.

VIEs

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

The Company evaluates quarterly its junior retained notes and preferred shares of LFT CRE 2021-FL1, Ltd. for potential consolidation. At June 30, 2023, the Company determined it was the primary beneficiary of LFT CRE 2021-FL1, Ltd. based on its obligation to absorb losses derived from ownership of its preferred shares. Accordingly, the Company consolidated the assets, liabilities, income and expenses of the underlying issuing entities. The Company's maximum exposure to loss from collateralized loan obligations ("CLO") was $166,250,000 at June 30, 2023 and December 31, 2022, respectively.

Collateralized Loan Obligations

Collateralized loan obligations ("CLOs") represent third-party liabilities of LFT CRE 2021-FL1, Ltd. and LFT CRE 2021-FL1, LLC (collectively, the "2021-FL1 CLO"). The 2021-FL1 CLO is a VIE and management has determined that the Company is the primary beneficiary of the 2021-FL1 CLO. Accordingly, the Company consolidates the assets, liabilities (other than the below investment grade-rated notes and preferred shares of the 2021-FL1 CLO retained by the Company that are eliminated on consolidation), income and expense of the 2021-FL1 CLO. The third-party obligations of the 2021-FL1 CLO do not have any recourse to the Company as the consolidator of the CLO. The third-party obligations of the 2021-FL1 CLO are carried at their outstanding unpaid principal balances, net of any deferred financing costs. Any premiums, discounts or deferred financing costs associated with these third-party obligations are amortized to interest expense using the effective interest method over the expected average life of the related obligations, or on a straight line basis when it approximates the effective interest method. The Company's maximum exposure to loss from CLOs was $166,250,000 at June 30, 2023 and December 31, 2022, respectively.

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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2023

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Cash and Cash Equivalents and Restricted Cash

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

Restricted cash includes cash held within the 2021-FL1 CLO as of June 30, 2023 and December 31, 2022, respectively.

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


	June 30, 2023		December 31, 2022
Cash and cash equivalents	$	98,495,690	$	43,858,515
Restricted cash held within the 2021-FL1 CLO	$	1,274,046	$	3,507,850
Total cash, cash equivalents and restricted cash	$	99,769,736	$	47,366,365

Deferred Offering Costs

Direct costs incurred to issue shares classified as equity, such as legal and accounting fees, are deducted from the related proceeds and the net amount recorded as stockholders' equity. Accordingly, payments made by the Company in respect of such costs related to the issuance of shares are recorded as an asset in the accompanying consolidated balance sheets in the line item "Other assets," for subsequent deduction from the related proceeds upon closing of the offering. To the extent that certain costs, in particular legal fees, are known to have been accrued but have not yet been invoiced and paid, they are included in "Other accounts payable and accrued expenses" on the accompanying consolidated balance sheets.

Fair Value Measurements

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

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

•Level 1 Inputs – Quoted prices for identical instruments in active markets.

•Level 2 Inputs – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

•Level 3 Inputs – Instruments with primarily unobservable value drivers.

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

The following methods and assumptions are used to estimate the fair value of each class of financial instrument, for which it is practicable to estimate that value:

•Cash and cash equivalents: The carrying amount of cash and cash equivalents approximates fair value.

•Restricted cash: The carrying amount of restricted cash approximates fair value.

•Commercial mortgage loans: The Company determines the fair value of commercial mortgage loans by utilizing a pricing model based on discounted cash flow methodologies using discount rates, which reflect current market interest rates that would be offered for loans with similar characteristics and credit quality. Additionally, the Company may record fair value adjustments on a non-recurring basis when it has determined it necessary to record a specific impairment reserve or charge-off against a loan and the Company measures such specific reserve or charge-off using the fair value of the loan's collateral. To determine the fair value of loan collateral, the Company employs the income capitalization approach, appraised values, broker opinion of value, sale offers, letters of intention to purchase, or other valuation benchmarks, as applicable, depending upon the nature of such collateral and other relevant market factors.

•Mortgage servicing rights: The Company determines the fair value of MSRs from a third-party pricing service on a recurring basis. The third-party pricing service uses common market pricing methods that include using discounted cash flow models to calculate present value, estimated net servicing income and observed market pricing for MSR purchase and sale transactions. The model considers contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors.

•Collateralized loan obligations: The Company determines the fair value of collateralized loan obligations by utilizing a third-party pricing service. In determining the value of a particular investment, pricing service providers may use market spreads, inventory levels, trade and bid history, as well as market insight from clients, trading desks and global research platform.

•Secured term loan: The Company determines the fair value of its secured term loan based on a discounted cash flow methodology.

Commercial Mortgage Loans Held-for-Investment

Commercial mortgage loans held-for-investment represent floating-rate transitional loans and other commercial mortgage loans purchased or originated by the Company. These loans include loans sold into securitizations that the Company consolidates. Commercial mortgage loans held-for-investment are

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2023

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

intended to be held-to-maturity and, accordingly, are carried at their unpaid principal balances, adjusted for net unamortized loan fees and costs (in respect of originated loans), premiums and discounts (in respect of purchased loans) and impairment, if any.

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

As of June 30, 2023, the Company held one loan on non-accrual status and interest collections will be accounted for under the cost recovery method.

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

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

In the absence of any Company history of valuation reserves or realized loan losses since our inception in 2013, other than on one office loan, the Company elected to utilize a widely-used analytical model incorporating a loss-given-default methodology and loan performance data for over 100,000 commercial real estate loans dating back to 1998. The Company expects to use this data set, or variants of it, unless the Company develops its own sufficient history of realized losses. The Company determines its CECL estimate based on macroeconomic forecasts that include baseline, optimistic and pessimistic scenarios during the reasonable forecast period. The Company determined the key variables driving its CECL loss estimate are debt service coverage ratio and LTV ratio. Other notable variables include property type, property location and loan vintage.

The Company evaluates each loan rated Default Risk as to whether it is impaired on a quarterly basis. Impaired loans are individually evaluated based on the Company's quarterly assessment of each loan and assignment of a risk rating. Impairment occurs when the Company determines that the facts and circumstances of the loan deem it probable that the Company will not be able to collect all amounts due in accordance with the contractual terms of the loan. If a loan is considered to be impaired, an allowance is recorded to reduce the carrying value of the loan through a charge to the provision for (reversal of) credit losses. Impairment of these loans, all of which are deemed collateral dependent, is measured by comparing the estimated fair value of the underlying collateral, less costs to sell, to the book value of the respective loan. These valuations require significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, actions of other lenders, and other factors deemed necessary by the Manager. Any loans deemed to be collateral dependent will be removed from the pool of assets measured under CECL. Actual losses, if any, could ultimately differ from estimated losses.

The following table illustrates the day-one financial statement impact of the adoption of ASU 2016-13 on January 1, 2023:


	Pre-adoption		Transition adjustment		Post-adoption
Assets
Commercial mortgage loans, held-for-investment	$	1,076,148,186	$	—	$	1,076,148,186
Less: Allowance for credit losses	(4,258,668)		(3,549,501)		(7,808,169)
Commercial mortgage loans, held-for-investment, net of allowance for credit losses	$	1,071,889,518	$	(3,549,501)	$	1,068,340,017

Liabilities
Other liabilities(1)	$	583,989	$	41,939	$	625,928

Equity
Accumulated earnings	$	31,250,852	$	(3,591,440)	$	27,659,412

(1) Includes reserve for unfunded loan commitments

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

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2023

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

1.Very Low Risk: exceeds expectations and is outperforming underwriting or it is very likely that the underlying loan can be refinanced easily in the period's prevailing capital market conditions

2.Low Risk: meeting or exceeding underwritten expectation

3.Moderate Risk: consistent with underwritten expectations or the sponsor may be in the early stages of executing the business plan and the loan structure appropriately mitigates additional risks

4.High Risk: potential risk of default, a loss may occur in the event of default

5.Default Risk: imminent risk of default, a loss is likely in the event of default

Mortgage Servicing Rights, at Fair Value

Mortgage servicing rights ("MSRs") are associated with residential mortgage loans that the Company historically purchased and subsequently sold or securitized. MSRs are held and managed at Five Oaks Acquisition Corp. ("FOAC"), the Company's taxable REIT subsidiary ("TRS"). As the owner of MSRs, the Company is entitled to receive a portion of the interest payments from the associated residential mortgage loan, and is obligated to service, directly or through a subservicer, the associated loan. MSRs are reported at fair value. Residential mortgage loans for which the Company owns the MSRs are directly serviced by two sub-servicers retained by the Company. The Company does not directly service any residential mortgage loans.

MSR income is recognized at the contractually agreed upon rate, net of the costs of sub-servicers retained by the Company. If a sub-servicer with which the Company contracts were to default, an evaluation of MSR assets for impairment would be undertaken at that time.

Secured Term Loan

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

Common Stock

At June 30, 2023 and December 31, 2022, the Company was authorized to issue up to 450,000,000 shares of common stock, par value $0.01 per share. On February 22, 2022, the Company closed a transferable common stock rights offering and issued 27,277,269 shares of common stock. The Company had 52,231,152 shares of common stock issued and outstanding at June 30, 2023 and December 31, 2022.

Stock Repurchase Program

On December 15, 2015, the Company's Board of Directors (the "Board") authorized a stock repurchase program ("Repurchase Program"), to repurchase up to $10 million of the Company's outstanding common stock. Subject to applicable securities laws, repurchase of common stock under the Repurchase Program may be made at times and in amounts as the Company deems appropriate, using available cash resources. Shares of common stock repurchased by the Company under the Repurchase Program, if any, will be canceled and, until reissued by the Company, will be deemed to be authorized but unissued shares of common stock. The Repurchase Program may be suspended or discontinued by the Company at any time and without prior notice.

Preferred Stock

At June 30, 2023 and December 31, 2022, the Company was authorized to issue up to 50,000,000 shares of preferred stock, par value $0.01 per share, with such designations, voting and other rights and preferences as may be determined from time to time by the Board. On May 5, 2021, the Company issued 2,400,000 shares of 7.875% Series A Cumulative Redeemable Preferred Stock (Series A Preferred Stock"). The Company had 2,400,000 shares of preferred stock issued and outstanding at June 30, 2023 and December 31, 2022, respectively. Our preferred stock is classified as permanent equity and carried at its liquidation preference less offering costs. See Note 12 for additional information related to our Series A Preferred Stock.

Income Taxes

The Company has elected to be taxed as a REIT under the Code for U.S. federal income tax purposes, commencing with the Company's short taxable period ended December 31, 2012. A REIT is generally taxable as a U.S. C-Corporation; however, so long as the Company qualifies as a REIT it is entitled to a special deduction for dividends paid to stockholders not otherwise available to corporations. Accordingly, the Company generally will not be subject to U.S. federal income tax to the extent its distributions to stockholders equals, or exceeds, its REIT taxable income for the year. In addition, the Company must continue to meet certain REIT qualification requirements with respect to distributions, as well as certain asset, income and share ownership tests, in accordance with Sections 856 through 860 of the Code, as summarized below. In addition, the TRS is maintained to perform certain services and earn income for the Company that the Company is not permitted to engage in as a REIT.

To maintain its qualification as a REIT, the Company must meet certain requirements, including but not limited to the following: (i) distribute at least 90% of its REIT taxable income to its stockholders; (ii) invest at least 75% of its assets in REIT qualifying assets, with additional restrictions with respect to asset concentration risk; and (iii) earn at least 95% of its gross income from qualifying sources of income, including at least 75% from qualifying real estate and real estate related sources. Regardless of the REIT election, the Company may also be subject to certain state, local and franchise taxes. Under certain circumstances, federal income and excise taxes may be due on its undistributed taxable income. If the Company were to fail to meet these requirements, it would be subject to U.S. federal income tax as a U.S. C-Corporation, which could have a material adverse impact on its results of operations and amounts available for distributions to its stockholders.

Certain activities of the Company are conducted through a TRS and therefore are taxed as a standalone U.S. C-Corporation. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2023

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

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

The Company assesses its tax positions for all open tax years and determines whether the Company has any material unrecognized liabilities in accordance with ASC 740, Income Taxes. The Company records these liabilities to the extent the Company deems them more likely than not to be incurred. The Company's accounting policy with respect to interest and penalties is to classify these amounts as other interest expense.

Earnings per Share

The Company calculates basic and diluted earnings per share by dividing net income attributable to common stockholders for the period by the weighted-average shares of the Company's common stock outstanding for that period. Diluted earnings per share takes into account the effect of dilutive instruments, such as warrants, stock options, and unvested restricted stock, but use the average share price for the period in determining the number of incremental shares that are to be added to the weighted-average number of shares outstanding. See Note 13 for details of the computation of basic and diluted earnings per share.

Stock-Based Compensation

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

Comprehensive Income (Loss) Attributable to Common Stockholders

For the three and six months ended June 30, 2023 and 2022, comprehensive income equaled net income; therefore, a separate consolidated statement of comprehensive income is not included in the accompanying consolidated financial statements.

Recently Issued and/or Adopted Accounting Standards

Credit Losses

On January 1, 2023, we adopted ASU 2016-13, which utilizes a current expected credit loss methodology ("CECL") for the recognition of credit losses for our commercial mortgage loans held-for-investment at amortized cost, at the time the financial asset is originated or acquired. The allowance for credit losses is adjusted for each period for changes in expected credit losses. This methodology replaces the multiple impairment methods in GAAP that generally required that a loss be incurred before it is recognized. We adopted ASU 2016-13 using the modified retrospective method, therefore, the results for reporting period prior to January 1, 2023 have been unadjusted and reported in accordance with previously applicable GAAP. Upon adoption of ASU 2016-13 on January 1, 2023, the Company recorded a cumulative-effect adjustment to accumulated earnings of $3.6 million, or $0.07 per common share.

The CECL reserve required under ASU 2016-13 is a valuation account that is deducted from the amortized cost basis of related commercial mortgage loans on our balance sheet, which will reduce our stockholders' equity. The initial reserve recorded on January 1, 2023 was reflected as a direct charge against accumulated earnings; however, future net changes to the CECL reserve will be recognized in net income on our consolidated statements of operations. ASU 2016-13 does not require use of a particular method for determining the CECL reserve, but it does specify the allowance should be based on relevant information about past events, including historical loss experience, composition of current commercial mortgage loan portfolio, current conditions in real estate and capital markets, and reasonable and supportable forecasts for the expected term of each loan. Additionally, but for a few narrow exceptions, ASU 2016-13 requires that all financial instruments subject to CECL incur some amount of valuation reserve to reflect the underlying principle of the CECL model, that all loans, debt securities and similar financial assets bear some inherent risk of loss regardless of credit quality, amount of subordinate capital, or other risk mitigants.

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The standard was issued to ease the accounting effects of reform to the London Interbank Offered Rate ("LIBOR") and other reference rates. The standard provides optional expedients and exceptions for applying GAAP to debt instruments, leases, derivatives and other contracts affected by reference rate reform. ASU 2020-04 generally considers contract modifications related to reference rate reform to be an event that does not require contract remeasurement at the modification date nor a reassessment of a previous accounting determination. The standard is effective for all entities as of March 12, 2020 through December 31, 2022 and may be elected over time as reference rate reform activities occur.

In December 2022, the FASB issued ASU 2022-06, deferring the sunset date of ASC 848, Reference Rate Reform, from December 31, 2022 to December 31, 2024. ASC 848 provides temporary relief relating to potential accounting impact relating to replacement of LIBOR or other reference rates expected to be discounted as a result of reference rate reform. We have not adopted any of the optional expedients or exceptions through June 30, 2023, but will continue to evaluate the possible adoption of any such expedients or exceptions.

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2023

NOTE 3 – COMMERCIAL MORTGAGE LOANS HELD-FOR-INVESTMENT

The following tables summarize certain characteristics of the Company's investments in commercial mortgage loans as of June 30, 2023 and December 31, 2022:


						Weighted Average
Loan Type	Unpaid Principal Balance		Carrying Value		Loan Count	Floating Rate Loan %		Coupon(1)		Term (Years)(2)
June 30, 2023
Loans held-for-investment
Senior secured loans(3)	$	1,021,956,208	$	1,021,042,905	66	100.0	%	8.6	%	3.1
Allowance for credit losses	N/A		(3,897,895)
	1,021,956,208		1,017,145,010		66	100.0	%	8.6	%	3.1


						Weighted Average
Loan Type	Unpaid Principal Balance		Carrying Value		Loan Count	Floating Rate Loan %		Coupon(1)		Term (Years)(2)
December 31, 2022
Loans held-for-investment
Senior secured loans(3)	$	1,076,865,099	$	1,076,148,186	71	100.0	%	7.6	%	3.5
Allowance for credit losses	NA		(4,258,668)
	1,076,865,099		1,071,889,518		71	100.0	%	7.6	%	3.5

(1) Weighted average coupon assumes applicable one-month LIBOR of 5.19% and 4.18% and 30-day Term Secured Overnight Financing Rate ("SOFR") of 5.14% and 4.19% as of June 30, 2023 and December 31, 2022, respectively, inclusive of weighted average interest rate floors of 0.25% and 0.27%, respectively. As of June 30, 2023, 73.9% of the investments by total investment exposure earned a floating rate indexed to one-month LIBOR and 26.1% of the investments by total investment exposure earned a floating rate indexed to 30-day Term SOFR. As of December 31, 2022, 77.4% of the investments by total investment exposure earned a floating rate indexed to one-month LIBOR and 22.6% of the investments by total investment exposure earned a floating rate indexed to 30-day Term SOFR.

(2) Weighted average remaining term assumes all extension options are exercised by the borrower, provided, however, that our loans may be repaid prior to such date.

(3) As of June 30, 2023, $994,914,714 of the outstanding senior secured loans were held in VIEs and $22,230,296 of the outstanding senior secured loans were held outside of VIEs. As of December 31, 2022, $996,511,403 of the outstanding senior secured loans were held in VIEs and $75,378,115 of the outstanding senior secured loans were held outside VIEs.

Activity: For the six months ended June 30, 2023, the loan portfolio activity was as follows:


	Commercial Mortgage Loans Held-for-Investment



Balance at December 31, 2022	$	1,071,889,518
Purchases, advances and originations	72,630,053
Principal payments	(123,583,470)
Accretion of purchase discount	1,196
Amortization of purchase premium	(10,687)
Accretion of deferred loan fees	129,300
Cumulative-effect adjustment upon adoption of ASU 2016-13	(3,549,501)
Provision for credit losses, net	(361,399)
Balance at June 30, 2023	$	1,017,145,010

Loan Risk Ratings: As further described in Note 2, the Company evaluates the commercial mortgage loan portfolio on a quarterly basis and assigns a risk rating based on a variety of factors. The following table presents the principal balance and net book value of the loan portfolio based on the Company's internal risk ratings as of June 30, 2023 and December 31, 2022:


	June 30, 2023
				Amortized Cost by Year of Origination
Risk Rating	Number of Loans	Outstanding Principal		2023	2022	2021	2019	2017
1	—	$	—	—	—	—	—	—
2	2	36,850,000		17,926,638	18,533,248	—	—	—
3	53	831,892,473		—	138,379,697	628,385,618	41,515,275	19,625,364
4	10	140,539,480		—	50,841,772	89,263,143	—	—

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2023

NOTE 3 - COMMERCIAL MORTGAGE LOANS HELD-FOR-INVESTMENT (Continued)


5	1	12,674,255		—	—	12,674,255	—	—
	66	$	1,021,956,208	17,926,638	207,754,717	730,323,016	41,515,275	19,625,364


	December 31, 2022
				Amortized Cost by Year of Origination
Risk Rating	Number of Loans	Outstanding Principal		2022	2021	2019	2018	2017
1	—	$	—	—	—	—	—	—
2	11	153,933,750		85,198,084	67,999,500	—	—	—
3	55	852,474,681		101,654,140	672,421,907	42,077,193	16,672,623	19,668,071
4	3	47,448,000		15,000,000	32,448,000	—	—	—
5	2	23,008,668		—	12,750,000	—	6,000,000	—
	71	$	1,076,865,099	201,852,224	785,619,407	42,077,193	22,672,623	19,668,071

As of June 30, 2023, the average risk rating of the commercial mortgage loan portfolio was 3.4 (Moderate Risk), weighted by investment carrying value, with 85.0% of the net carrying value of commercial loans held-for-investment rated 3 (Moderate Risk) or better by the Company's Manager.

As of December 31, 2022, the average risk rating of the commercial mortgage loan portfolio was 3.0 (Moderate Risk), weighted by investment carrying value, with 93.8% of the net carrying value of commercial loans held-for-investment rated 3 (Moderate Risk) or better by the Company's Manager.

The average risk rating of the portfolio has increased during the six months ended June 30, 2023. The change in underlying risk rating consisted of loans that paid off with a risk rating of "2" of $33.5 million, "3" of $84.0 million and a risk rating of "5" of $10.3 million, offset by the purchase of commercial mortgage loans with a risk rating of "2" of $17.9 million and , "3" of $55.0 million during the six months ended June 30, 2023. Additionally, $101.5 million of loans with a risk rating of "2" transitioned to a risk rating of "3," and $93.1 million of loans with a risk rating of "3" transitioned to a risk rating of "4".

Concentration of Credit Risk: The following tables present the geographic and property types of collateral underlying the Company's commercial mortgage loans as a percentage of the loans' carrying value as of June 30, 2023 and December 31, 2022:

Loans Held-for-Investment


	June 30, 2023		December 31, 2022
Geography
South	45.2	%	46.6	%
Southwest	24.8		26.7
Mid-Atlantic	15.4		12.4
Midwest	7.9		8.0
West	6.7		6.3
Total	100.0	%	100.0	%


	June 30, 2023		December 31, 2022
Collateral Property Type
Multifamily	89.5	%	89.6	%
Seniors Housing and Healthcare	8.6		6.4
Self-Storage	1.9		1.8
Retail	—		1.6
Office	—		0.6
Total	100.0	%	100.0	%

Allowance for Credit Losses:

The following table presents the changes for the three and six months ended June 30, 2023 and June 30, 2022 in the allowance for credit losses on the outstanding balances of the Company's loans held-for-investment:

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2023

NOTE 3 - COMMERCIAL MORTGAGE LOANS HELD-FOR-INVESTMENT (Continued)


	Three months ended				Six months ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Allowance for credit losses at beginning of period	$	3,357,527	$	—	$	4,258,668	$	—
Cumulative-effect adjustment upon adoption of ASU 2016-13	—		—		3,549,501
Provision for credit losses	540,368		—		361,399		—
Charge offs	—		—		(4,271,673)
Allowance for credit losses at end of period	$	3,897,895	$	—	$	3,897,895	$	—

The following table presents the changes for the three and six months ended June 30, 2023 and June 30, 2022 in the provision for (release of) credit losses on the unfunded commitments of the Company's loans held-for-investment:


	Three months ended				Six months ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Allowance for credit losses at beginning of period	$	41,225	$	—	$	—	$	—
Cumulative-effect adjustment upon adoption of ASU 2016-13	—		—		41,939		—
(Reversal of) credit losses	14,716		—		14,002		—
Charge offs	—		—		—		—
Allowance for credit losses at end of period	$	55,941	$	—	$	55,941	$	—

We did not have any impaired loans, non-accrual loans, or loans in maturity default other than the loans discussed below as of June 30, 2023 or December 31, 2022.

In February 2023, in connection with the sale of the office building collateralizing an impaired loan by the borrower to an unaffiliated third-party, the Company accepted a discounted payoff of approximately $6.0 million on the impaired loan, which had an unpaid principal balance of $10.3 million. An allowance for credit loss of $4.3 million was recorded for this impaired loan in the year ended December 31, 2022. Upon the discounted payoff, a $4.3 million charge off against the allowance for credit losses was recorded, with de minimis impact to income in the six months ended June 30, 2023.

During the period ended June 30, 2023, management continued to identify one loan, collateralized by a multifamily property, with an unpaid principal value of $12.8 million as impaired due to monetary default; however, no reserve is required after analysis of underlying collateral value. This loan is on non-accrual status as a result of the monetary default and impaired loan classification.

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

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

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

The 2021-FL1 CLO is subject to collateralization and coverage tests that are customary for these types of securitizations. As of June 30, 2023 and December 31, 2022 all such collateralization and coverage tests in the 2021-FL1 CLO were met.

The carrying values of the Company's total assets and liabilities related to the 2021-FL1 CLO at June 30, 2023 and December 31, 2022 included the following VIE assets and liabilities:


ASSETS	June 30, 2023		December 31, 2022
Cash, cash equivalents and restricted cash	$	1,274,046	$	3,507,850
Accrued interest receivable	5,802,948		5,488,118
Investment related receivable	—		—
Loans held for investment, net of allowance for credit losses	994,914,714		996,511,403
Total Assets	$	1,001,991,708	$	1,005,507,371

LIABILITIES
Accrued interest payable	$	2,455,667	$	2,264,646
Collateralized loan obligations(1)	830,564,083		829,310,498

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2023

NOTE 4 – USE OF SPECIAL PURPOSE ENTITIES AND VARIABLE INTEREST ENTITIES (Continued)


Total Liabilities	$	833,019,750	$	831,575,144
Equity	168,971,958		173,932,227
Total liabilities and equity	$	1,001,991,708	$	1,005,507,371

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

The following tables present certain loan and borrowing characteristics of the 2021-F11 CLO as of June 30, 2023 and December 31, 2022:


As of June 30, 2023
Collateralized Loan Obligations	Count	Principal Value		Carrying Value(1)		Wtd. Avg. Coupon(2)
Collateral (loan investments)	64	$	999,042,153	$	994,914,714	8.62%
Financing provided	1	$	833,750,000	$	830,564,083	6.63%


As of December 31, 2022
Collateralized Loan Obligations	Count	Principal Value		Carrying Value(1)		Wtd. Avg. Coupon(2)
Collateral (loan investments)	64	$	996,492,150	$	996,511,403	7.60%
Financing provided	1	$	833,750,000	$	829,310,498	5.75%

(1) The carrying value for the 2021-FL1 CLO is net of debt issuance costs of $3,185,917 and $4,439,502 for June 30, 2023 and December 31, 2022, respectively.

(2) Weighted average coupon for loan investments assumes applicable one-mont

Lument Finance Trust, Inc. [LFT] Filings

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