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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 March 31, 2021
OR
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) 
Maryland45-4966519
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification Number)

230 Park Avenue, 23rd Floor, New York, New York
10169
(Address of principal executive offices)(Zip code)

Registrant's Telephone Number, including area code (212) 521-6323
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 shareLFTNew York Stock Exchange
7.875% Series A Cumulative Redeemable Preferred Stock, par value $0.01 per shareLFTPrANew 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 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 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
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
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 May 10, 2021
Common stock, $0.01 par value 24,943,383





LUMENT FINANCE TRUST, INC.
 
INDEX
 
PART I - Financial Information
 
   
Item 1. 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
   
   
Item 1.
Item 1A.
Risk Factors
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
   
 





PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 

LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
 
March 31, 2021(1)
December 31, 2020(1)
 (unaudited) 
ASSETS  
Cash and cash equivalents$11,717,804 $11,375,960 
Restricted cash32,154,188 57,999,396 
Commercial mortgage loans held-for-investment, at amortized cost484,165,249 547,345,334 
Mortgage servicing rights, at fair value899,223 919,678 
Accrued interest receivable2,173,007 2,015,617 
Investment related receivable 34,539,187  
Other assets1,757,914 1,833,794 
Total assets$567,406,572 $621,489,779 
LIABILITIES AND EQUITY  
LIABILITIES:  
Collateralized loan obligations, net409,404,872 463,060,090 
Secured term loan, net39,598,532 39,556,198 
Accrued interest payable393,130 432,936 
Dividends payable2,248,612 3,242,640 
Fees and expenses payable to Manager1,204,688 1,156,340 
Other accounts payable and accrued expenses290,670 338,423 
Total liabilities453,140,504 507,786,627 
COMMITMENTS AND CONTINGENCIES (NOTES 10 & 11)
EQUITY:  
Common Stock: par value $0.01 per share; 450,000,000 shares authorized, 24,943,383 shares issued and outstanding, at March 31, 2021 and December 31, 2020, respectively
249,389 249,389 
Additional paid-in capital233,853,156 233,850,271 
Cumulative distributions to stockholders(133,604,590)(131,355,978)
Accumulated earnings13,668,613 10,859,970 
Total stockholders' equity114,166,568 113,603,652 
Noncontrolling interests$99,500 $99,500 
Total equity$114,266,068 $113,703,152 
Total liabilities and equity$567,406,572 $621,489,779 

(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 March 31, 2021 and December 31, 2020, assets of consolidated VIEs related to Hunt CRE 2017-F1, Ltd. and Hunt CRE 2018-FL2, Ltd. totaled $537,399,673 and $591,318,506, respectively and the liabilities of consolidated VIEs related to Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd totaled $409,716,943 and $463,411,967 respectively. See Note 4 for further discussion.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1




LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended March 31, 2021Three Months Ended March 31, 2020
Revenues:  
Interest income:  
Commercial mortgage loans held-for-investment$7,470,117 $9,165,805 
Cash and cash equivalents4,300 28,167 
Interest expense:  
Collateralized loan obligations(2,185,242)(4,237,889)
Secured term loan(771,865)(780,441)
Net interest income4,517,310 4,175,642 
Other income (loss):  
Unrealized (loss) on mortgage servicing rights(20,455)(877,749)
Servicing income, net124,156 194,147 
Other income 2 
Total other income (loss)103,701 (683,600)
Expenses:  
Management and incentive fees720,999 584,821 
General and administrative expenses680,314 765,892 
Operating expenses reimbursable to Manager312,454 461,121 
Other operating expenses34,753 300,926 
Compensation expense49,135 54,132 
Total expenses1,797,655 2,166,892 
Net income before provision for income taxes2,823,356 1,325,150 
(Provision for) benefit from income taxes(14,713)226,521 
Net income2,808,643 1,551,671 
Dividends to preferred stockholders(3,708)(3,750)
Net income attributable to common stockholders$2,804,935 $1,547,921 
Earnings per share:  
Net income attributable to common stockholders (basic and diluted)$2,804,935 $1,547,921 
Weighted average number of shares of common stock outstanding24,943,383 24,911,483 
Basic and diluted income per share$0.11 $0.06 
Dividends declared per share of common stock$0.09 $0.08 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2




LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Equity
(unaudited)
 Common StockAdditional
Paid-in
Capital
Cumulative
Distributions to
Stockholders
Accumulated Earnings Total Stockholders' EquityNoncontrolling interestsTotal
Equity
 SharesPar Value
Balance at December 31, 202024,943,383 $249,389 $233,850,271 $(131,355,978)$10,859,970 $113,603,652 $99,500 $113,703,152 
Issuance of common stock— — — — — $ — $ 
Cost of issuing common stock— —  — — $ — $ 
Restricted stock compensation expense— — 2,885 — — $2,885 — $2,885 
Net income— — — — 2,808,643 $2,808,643 — $2,808,643 
Common dividends declared— — — (2,244,904)— $(2,244,904)— $(2,244,904)
Preferred dividends declared— — — (3,708)— (3,708)— $(3,708)
Balance at March 31, 202124,943,383 $249,389 $233,853,156 $(133,604,590)$13,668,613 $114,166,568 $99,500 $114,266,068 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3




LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Equity
(unaudited)

Common StockAdditional
Paid-in
Capital
Cumulative
Distributions to
Stockholders
Accumulated
Earnings
Total Stockholders' EquityNoncontrolling interestsTotal
Equity
SharesPar Value
Balance at December 31, 201923,692,164 $236,877 $228,135,116 $(122,236,981)$2,410,200 $108,545,212 $99,500 $108,644,712 
Issuance of common stock1,246,719 12,467 5,734,908 — — $5,747,375 — $5,747,375 
Cost of issuing common stock— — (13,333)— — $(13,333)— $(13,333)
Restricted stock compensation expense— — 7,882 — — $7,882 — $7,882 
Net income— — — — 1,551,671 $1,551,671 — $1,551,671 
Common dividends declared— — — (1,870,416)— $(1,870,416)— $(1,870,416)
Preferred dividends declared— — — (3,750)— $(3,750)— $(3,750)
Balance at March 31, 202024,938,883 249,344 233,864,573 (124,111,147)3,961,871 113,964,641 99,500 114,064,141 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4




LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended
March 31, 2021
Three Months Ended
March 31, 2020
Cash flows from operating activities:  
Net income$2,808,643 $1,551,671 
Adjustments to reconcile net income to net cash provided by operating activities:  
Accretion of collateralized loan obligations discounts, net207,767 273,188 
Amortization of deferred offering costs (13,333)
Amortization of deferred financing costs253,254 256,069 
Unrealized loss on mortgage servicing rights20,455 877,749 
Restricted stock compensation expense2,885 7,882 
Net change in:  
Accrued interest receivable(157,390)(81,404)
Deferred offering costs 13,333 
Other assets75,880 (582,432)
Accrued interest payable(39,806)(241,020)
Fees and expenses payable to Manager48,348 21,019 
Other accounts payable and accrued expenses(47,753)289,276 
Net cash provided by operating activities3,172,283 2,371,998 
Cash flows from investing activities:  
Purchase of commercial mortgage loans held-for-investment(34,888,000)(38,613,756)
Principal payments from commercial mortgage loans held-for-investment98,068,085 34,507,879 
Investment related receivable(34,539,187) 
Net cash provided by (used in) investing activities28,640,898 (4,105,877)
Cash flows from financing activities:  
Proceeds from issuance of common stock 5,747,375 
Dividends paid on common stock(3,242,640)(1,776,912)
Payment of collateralized loan obligations(54,073,905) 
Net cash (used in) provided by financing activities(57,316,545)3,970,463 
Net (decrease) increase in cash, cash equivalents and restricted cash(25,503,364)2,236,584 
Cash, cash equivalents and restricted cash, beginning of period69,375,356 16,011,830 
Cash, cash equivalents and restricted cash, end of period$43,871,992 $18,248,414 
Supplemental disclosure of cash flow information  
Cash paid for interest$2,535,893 $4,730,094 
Non-cash investing and financing activities information  
Dividends declared but not paid at end of period$2,248,612 $1,874,166 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2021
NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS

Lument Finance Trust, Inc. (together with its consolidated subsidiaries, the "Company"), formerly Hunt Companies Finance Trust, Inc. is a Maryland corporation that focuses primarily on investing in, financing and managing a portfolio of commercial real estate ("CRE") debt investments. Effective January 3, 2020, the Company is externally managed by OREC Investment Management, LLC, doing business as Lument Investment Management (the "Manager" or "Lument IM"), who replaced the prior manager, Hunt Investment Management, LLC ("HIM"). On December 28, 2020, the Company changed its name from Hunt Companies Finance Trust, Inc. to Lument Finance Trust, Inc., and its common stock began trading on the NYSE under the symbol "LFT." Previously, the Company's common stock was listed on the NYSE under the symbol "HCFT."

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.
 
On January 3, 2020, the Company and HIM entered into a termination agreement pursuant to which the Company and HIM agreed to mutually and immediately terminate that certain management agreement dated January 18, 2018. The Company simultaneously entered into a new management agreement with Lument IM. Pursuant to the terms of the termination agreement between the Company and HIM, the termination of the management agreement did not trigger, and HIM was not paid, a termination fee by the Company. See Note 10 for further discussion.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited condensed 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 condensed 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, 2020, which was filed with the Securities and Exchange Commission (“SEC”) on March 15, 2021.

Principles of Consolidation

The accompanying condensed 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"). Entities which the Company does not control and entities which are VIEs in which the Company is not the primary beneficiary are accounted for under the equity method or other appropriate GAAP. All significant intercompany transactions have been eliminated on consolidation.

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 Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. for potential consolidation. At March 31, 2021, the Company determined it was the primary beneficiary of Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, 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 $124,046,671 at March 31, 2021 and December 31, 2020.

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. As of March 31, 2021, the novel coronavirus, or COVID-19, pandemic is ongoing. During 2020, the COVID-19 pandemic created disruption in global supply chains, increased rates of unemployment and adversely impacted many industries, including industries related to the collateral underlying certain of our loans. In 2021, the global economy has, with certain setbacks, begun reopening and wider distribution of vaccines will likely encourage greater economic activity. Nonetheless, the recovery could remain uneven, particularly given uncertainty with respect to the distribution and acceptance of the vaccines and their effectiveness with respect to new variants of the virus. We believe the estimates and assumptions underlying our consolidated financial statements are reasonable and supportable based on the information available as of March 31, 2021, however uncertainty over the ultimate impact of COVID-19 on the global economy generally, and our business in particular, makes any estimates and assumptions as of March 31, 2021 inherently less certain than they would be absent the current and potential impacts of COVID-19. Actual results could differ from our estimates and the differences may be material.



6



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2021
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 Hunt CRE 2018-FL2 as of March 31, 2021 and December 31, 2020.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same amounts shown in the statements of cash flows.
March 31, 2021December 31, 2020
Cash and cash equivalents$11,717,804 $11,375,960 
Restricted cash CRE 2018-FL2, Ltd.$32,154,188 $57,999,396 
Total cash, cash equivalents and restricted cash$43,871,992 $69,375,356 

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 "Deferred offering costs", 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 InputsQuoted 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, letter of intentions of 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 by the Company. These loans include loans sold into securitizations that the Company consolidates. Commercial mortgage loans held-for-investment are 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.
7



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2021
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 using the effective interest method, or on a straight line basis when it approximates 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 March 31, 2021, the Company did not hold any loans placed in non-accrual status.

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:

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 expectations
3.Moderate Risk: in-line 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

The Company evaluates each loan rated High Risk or above 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 loan 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. Actual losses, if any, could ultimately differ from estimated losses.

In addition, the Company evaluates the entire portfolio to determine whether the portfolio has any impairment that requires a valuation allowance on the remainder of the loan portfolio. As of March 31, 2021, the Company has not recognized any impairments on its loans held-for-investment. We also assessed the remainder of the portfolio, considering the absence of delinquencies and current market conditions, and, as such has not recorded any allowance for loan losses.

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.

Collateralized Loan Obligations

Collateralized loan obligations represent third-party liabilities of Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. (the "CLOs"). The CLOs are VIEs that the Company has determined it is the primary beneficiary of and accordingly are consolidated in the Company's financial statements, excluding liabilities of the CLOs acquired by the Company that are eliminated on consolidation. The third-party obligations of the CLOs do not have any recourse to the Company as the consolidator of the CLOs. CLOs are carried at their outstanding unpaid principal balances, net of any unamortized discounts or deferred financing costs. Any premiums, discounts or deferred financing costs associated with these liabilities 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. In the second quarter of 2020, $624,816 in costs related to a contemplated collateralized loan transaction, that were previously deferred as "other assets" in the consolidated balance sheets were expensed as "other operating expenses" in the consolidated statements of operations as a result of abandoning the contemplated transaction due to the then current market environment, which had been impacted by the COVID-19 pandemic.

Secured Term Loan

The Company and certain of its subsidiaries are party to a $40.25 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 of $1,017,419 associated with this liability are amortized to interest expense on a straight line basis when it approximates the effective interest method. See Note 16 for additional information related to the Secured Term Loan.

Common Stock

At March 31, 2021 and December 31, 2020, the Company was authorized to issue up to 450,000,000 shares of common stock, par value $0.01 per share. The Company had 24,943,383 shares of common stock issued and outstanding at March 31, 2021 and December 31, 2020, respectively.

8



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2021
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock Repurchase Program

On December 15, 2015, the Company’s Board of Directors 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, the 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 March 31, 2021 and December 31, 2020, 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 Company's Board of Directors. The Company had no shares of preferred stock issued and outstanding at March 31, 2021 and December 31, 2020. See Note 16 for additional information related to our 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 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 issued to its Manager and non-management directors using the fair-value based methodology prescribed by ASC 505, Equity ("ASC 505"), or ASC 718, Share-Based Payment ("ASC 718"), as appropriate. Compensation cost related to restricted common stock issued to the Manager is initially measured at estimated fair value at the grant date, and is remeasured on subsequent dates to the extent the awards are unvested. Additionally, the compensation cost related to restricted common stock issued to the non-management directors is measured at its estimated fair value at the grant date and amortized and expensed over the vesting period. See Note 10 for details of stock-based awards issuable under the Manager Equity Plan.

Comprehensive Income (Loss) Attributable to Common Stockholders

For the three months ended March 31, 2021 and 2020, comprehensive income equaled net income; therefore, a separate consolidated statement of comprehensive income is not included in the accompanying consolidated financial statements.

9



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2021
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Issued and/or Adopted Accounting Standards

Credit Losses

In June 2016, the FASB issued ASU 2016-13, which is a comprehensive amendment of credit losses on financial instruments. Currently GAAP requires an "incurred loss" methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The standard’s core principle is that an entity replaces the "incurred loss" impairment methodology in current GAAP with a methodology that reflects current expected credit losses and requires consideration of a broader range of reasonable and supportable information to support credit loss estimates. For public business entities that are SEC filers, the amendment in this update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

In November 2019, the FASB issued ASU 2019-10 which amended the effective dates for implementation of ASU 2016-13. ASU 2019-10 defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, public business entities that are not SEC filers and all other companies, including not-for-profit companies and employee benefit plans for fiscal years beginning after December 15 2022, including interim periods within those fiscal years. The Company is designated as a smaller reporting company and has deferred implementation of ASU 2016-13 pursuant to ASU 2019-10 and is continuing to assess the impact of this guidance.

In February 2020, the FASB issued ASU 2020-02, amending SEC paragraphs in the Codification to reflect the issuance of SEC Staff Accounting Bulletin ("SAB") No. 119 related to the new credit losses standard and revised effective date of the new leases standard. SAB No. 119 provides interpretive guidance on methodologies and supporting documentation for measuring credit losses, with a focus on the documentation the staff would normally expect registrants engaged in lending transactions to prepare and maintain to support estimates of current expected credit losses for loan transactions. This new guidance is effective for fiscal years beginning after December 15, 2022 for smaller reporting companies such as the Company. The Company is assessing the impact of this guidance.

Accounting for Income Taxes

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This guidance eliminates certain exceptions to the general principles in Topic 740. This new guidance is effective for us on January 1, 2021, with early adoption permitted. The Company adopted ASU 2019-12 beginning with the first quarter of 2021, which had no material impact on the Company's financial condition or results of operations.

Financial Instruments

In March 2020, the FASB issued ASU 2020-03 which makes improvements to financial instruments guidance, including the current expected credit losses (CECL) guidance in ASU 2016-13. Only Issue 1, of the 7 improvement issues applies to the Company, which is effective upon issuance, requires all entities to provide fair value option disclosures. MSRs are reported at fair value as a result of the fair value election, as discussed in Mortgage Servicing Rights, at Fair Value above.

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 828): 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. We are currently evaluating the impact of this guidance on our consolidated financial statements.

CARES Act

On March 27, 2020, former President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"). Section 4013 of the CARES Act includes a provision that permits financial institutions an election to suspend temporarily troubled debt restructuring ("TDR") accounting under ASC Subtopic 310-40 in certain circumstances ("Section 4013 Elections"). Additionally, Section 4014 of the CARES Act includes a provision that permits deferral of the effective date of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), for insured depository institutions, bank holding companies, or any affiliates thereof ("Section 4014 Election"). The Company is not a financial institution, nor a depository institution, bank holding company or an affiliate of one and therefore would not be permitted to make Section 4013 or Section 4014 Elections. The Company is designated as a smaller reporting company for SEC filing purposes and has previously deferred implementation of ASU 2016-13 until January 1, 2023 pursuant to ASU 2019-10.


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 March 31, 2021 and December 31, 2020:







10



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2021
NOTE 3 - COMMERCIAL MORTGAGE LOANS HELD-FOR-INVESTMENT (Continued)
Weighted Average
Loan TypeUnpaid Principal BalanceCarrying ValueLoan CountFloating Rate Loan %
Coupon(1)
Remaining
Term
 (Years)(2)
March 31, 2021
Loans held-for-investment
Senior secured loans(3)
$484,165,249 $484,165,249 34 100.0 %5.1 %2.9
484,165,249 484,165,249 34 100.0 %5.1 %2.9

Weighted Average
Loan TypeUnpaid Principal BalanceCarrying ValueLoan CountFloating Rate Loan %
Coupon(1)
Remaining
Term
 (Years)(2)
December 31, 2020
Loans held-for-investment
Senior secured loans(3)
$547,345,334 $547,345,334 40 100.0 %5.1 %3.1
547,345,334 547,345,334 40 100.0 %5.1 %3.1

(1)    Weighted average coupon assumes applicable one-month LIBOR of 0.11% and 0.14% as of March 31, 2021 and December 31, 2020, respectively, inclusive of weighted average floors of 1.54% and 1.64%, respectively.
(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 March 31, 2021, $468,945,755 of the outstanding senior secured loans were held in VIEs and $15,219,494 of the outstanding senior secured loans were held outside VIEs. As of December 31, 2020, $531,363,401 of the outstanding senior secured loans were held in VIEs and $15,981,933 of the outstanding senior secured loans were held outside VIEs.

Activity: For the three months ended March 31, 2021, the loan portfolio activity was as follows:
Commercial Mortgage Loans Held-for-Investment
Balance at December 31, 2020$547,345,334 
Purchases and fundings34,888,000 
Proceeds from principal payments(98,068,085)
Balance at March 31, 2021$484,165,249 

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 March 31, 2021 and December 31, 2020:

March 31, 2021December 31, 2020
Risk RatingNumber of LoansUnpaid Principal BalanceNet Carrying ValueNumber of LoansUnpaid Principal BalanceNet Carrying Value
1 $     
210 149,871,667 149,871,667 14 168,401,366 168,401,366 
321 293,534,594 293,534,594 20 309,726,343 309,726,343 
43 40,758,988 40,758,988 6 69,217,625 69,217,625 
5      
34 $484,165,249 484,165,249 40 547,345,334 547,345,334 

As of March 31, 2021, the average risk rating of the commercial mortgage loan portfolio was 2.7 (Moderate Risk), weighted by investment carrying value, with 91.6% of commercial loans held-for-investment rated 3 (Moderate Risk) or better by the Company's Manager.

As of December 31, 2020, the average risk rating of the commercial mortgage loan portfolio was 3.1 (Moderate Risk), weighted by investment carrying value, with 84.4% of commercial loans held-for-invested rated 3 (Moderate Risk) or better by the Company's Manager.

The decrease in average risk rating is primarily the result of commercial mortgage loans that paid off with a risk rating of "4" of $16.7 million, the purchase of $34.9 million of commercial mortgage loans with a risk rating of "2" and the migration of $31.1 million of commercial mortgage loans from a risk rating of "4" to a risk rating of "3" during the first quarter of 2021.

11



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2021
NOTE 3 - COMMERCIAL MORTGAGE LOANS HELD-FOR-INVESTMENT (Continued)
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 March 31, 2021 and December 31, 2020:

Loans Held-for-Investment
March 31, 2021December 31, 2020
Geography
Southwest39.0 %38.7 %
South30.4 36.5 
Midwest19.0 16.8 
Mid-Atlantic7.0 6.2 
West4.6 1.8 
Total100.0 %100.0 %

March 31, 2021December 31, 2020
Collateral Property Type
Multifamily88.2 %89.5 %
Retail7.2 6.4 
Office3.7 3.3 
Self-Storage0.9 0.8 
Total100.0 %100.0 %

We did not have any impaired loans, nonaccrual loans, or loans in maturity default as of March 31, 2021 or December 31, 2020.

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

On April 30, 2018, the Company acquired Hunt CMT Equity LLC, which was comprised of commercial mortgage loans financed through collateralized loan obligations ("Hunt CRE 2017-FL1, Ltd."), a licensed commercial mortgage lender and eight loan participations. As discussed in Note 2 ("Summary of Significant Accounting Policies - Principles of Consolidation - VIE"), the Company determined Hunt CRE 2017-FL1, Ltd., a CRE CLO, was a VIE and that the Company was the primary beneficiary of the issuing entity, and accordingly consolidated its assets and liabilities into the Company's financial statements in accordance with GAAP. On August 20, 2018, the Company closed a CRE CLO ("Hunt CRE 2018-FL2, Ltd."). As discussed in Note 2 ("Summary of Significant Accounting Policies - Principles of Consolidation - VIE"), the Company determined Hunt CRE 2018-FL2, Ltd., a CRE CLO, was a VIE and the Company was the primary beneficiary of the issuing entity, and accordingly consolidated its assets and liabilities into the Company's financial statements in accordance with GAAP. However, the assets of each of the trusts are restricted, and can only be used to fulfill the obligations of the respective trusts. Additionally, the obligations of each of the trusts do not have any recourse to the Company as the consolidator of the trusts. At March 31, 2021, the Company continued to determine it was the primary beneficiary of Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. based on its obligations to absorb losses derived from ownership of preferred shares.

The CRE CLOs we consolidate are subject to collateralization and coverage tests that are customary for these types of securitizations. As of March 31, 2021 and December 31, 2020 all such collateralization and coverage tests in the CRE CLOs we consolidate were met. If the duration of the COVID-19 pandemic continues to prolong, its impact on our borrowers and their tenants could result in a sustained deterioration in a material amount of assets and may impact these tests.

The carrying values of the Company's total assets and liabilities related to Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. at March 31, 2021 and December 31, 2020 included the following VIE assets and liabilities:

ASSETSMarch 31, 2021December 31, 2020
Cash, cash equivalents and restricted cash$32,154,188 $57,999,396 
Accrued interest receivable(1)
2,110,781 1,955,709 
Investment related receivable(2)
34,188,949  
Loans held for investment468,945,755 531,363,401 
Total Assets$537,399,673 $591,318,506 
LIABILITIES
Accrued interest payable$312,071 $351,877 
Collateralized loan obligations(3)
409,404,872 463,060,090 
Total Liabilities$409,716,943 $463,411,967 
Equity127,682,730 127,906,539 
Total liabilities and equity$537,399,673 $591,318,506 

12



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2021
NOTE 4 – USE OF SPECIAL PURPOSE ENTITIES AND VARIABLE INTEREST ENTITIES (Continued)
(1)    Accrued interest receivable includes $498,911 of interest and exit fees receivable, which were settled subsequent to March 31, 2021.
(2)    Investment related receivable relates to one loan in Hunt CRE 2017-FL1 with a principal amount due of 9,808,696 and two loans in Hunt CRE 2018-FL2 with principal amounts due of $24,380,253 which paid off in March 2021 after the March remittance and were received in April. The Hunt CRE 2017-FL1 repayment will be used to pay down the Class A Notes of the CLO in April 2021.
(3)     The stated maturity of the collateral loan obligations per the terms of the underlying collateralized loan obligation agreement is August 15, 2034 for Hunt CRE 2017-FL1, Ltd. and August 15, 2028 for Hunt CRE 2018-FL2, Ltd.

The following tables present certain loan and borrowing characteristics of Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. as of March 31, 2021 and December 31, 2020:
As of March 31, 2021
Collateralized Loan ObligationsCountPrincipal Value
Carrying Value(1)
Wtd. Avg. Yield
Collateral (loan investments)34$468,945,755 $468,945,755 
L + 3.53%
Financings provided2411,242,221 409,404,872 
L + 1.50%

As of December 31, 2020
Collateralized Loan ObligationsCountPrincipal Value
Carrying Value(1)
Wtd. Avg. Yield
Collateral (loan investments)40$531,363,401 $531,363,401 
L + 3.50%
Financing provided2465,316,126 463,060,090 
L + 1.44%

(1)     The carrying value for Hunt CRE 2017-FL1, Ltd. is net of discount of $0 and $207,767 for March 31, 2021 and December 31, 2020, respectively and the carrying value for Hunt CRE 2018-FL2, Ltd. is net of debt issuance costs of $1,837,349 and $2,048,269 for March 31, 2021 and December 31, 2020, respectively.

The statement of operations related to Hunt CRE 2017-FL1, Ltd. and Hunt CRE 2018-FL2, Ltd. for the three months ended March 31, 2021 and March 31, 2020 include the following income and expense items:
Statements of OperationsThree Months Ended March 31, 2021Three Months Ended March 31, 2020
Interest income$7,263,861 $9,032,178 
Interest expense(2,185,242)(4,237,889)
Net interest income$5,078,619 $4,794,289 
General and administrative fees(120,586)(145,986)
Net income$4,958,033 $4,648,303 

NOTE 5 - RESTRICTED CASH

Hunt CRE 2018-FL2, Ltd. is actively managed with an initial reinvestment period of 36 months that expires in August 2021. As loans payoff or mature, as applicable, during this reinvestment period, cash received is restricted and intended to be reinvested within Hunt CRE 2018-FL2, Ltd. in accordance with the terms and conditions of their respective governing agreements.

NOTE 6 - SECURED TERM LOAN

On January 15, 2019, the Company, together with its FOAC and Hunt CMT Equity subsidiaries (together with the Company, the "Credit Parties"), entered into the Secured Term Loan, as amended on February 13, 2019 and July 9, 2020 with the lenders party thereto and Cortland Capital Market Services, LLC, as administrative agent (in such capacity, the "Agent"), providing for a term facility ("Credit Agreement") to be drawn in an aggregate principal amount of $40.25 million with a maturity of 6 years.

On February 14, 2019, the Company drew on the Secured Term Loan in the aggregate principal amount of $40.25 million generating net proceeds of $39.2 million. The outstanding balance of the Secured Term Loan in the table below is presented gross of deferred financing costs ($651,468 and $693,802 at March 31, 2021 and December 31, 2020, respectively). As of March 31, 2021 and December 31, 2020, the outstanding balance and total commitment under the Credit Agreement consisted of the following:
March 31, 2021December 31, 2020
Outstanding BalanceTotal CommitmentOutstanding BalanceTotal Commitment
Secured Term Loan$40,250,000 $40,250,000 $40,250,000 $40,250,000 
Total$40,250,000 $40,250,000 $40,250,000 $40,250,000 

The borrowings under the Secured Term Loan are joint and several obligations of the Credit Parties. In addition, the Credit Parties’ obligations under the Secured Term Loan are secured by substantially all the assets of the Credit Parties through pledge and security documentation. Amounts advanced under the Secured Term Loan are subject to compliance with a borrowing base comprised of assets of the Credit Parties and certain of their subsidiaries, and include senior and subordinated CRE mortgage loans, preferred equity in CRE assets (directly or indirectly), CRE construction mortgage loans and certain types of equity interests (the "Eligible Assets"). Borrowings under the Secured Term Loan bear interest at a fixed rate of 7.25% for the five-year period following the
13



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2021
NOTE 6 – SECURED TERM LOAN (Continued)
initial draw-down, which is subject to step up by 0.25% for the first four months after the fifth anniversary of the borrowing of the Senior Secured Term Loan, then by 0.375% for the following four months, then by 0.50% for the last four months until maturity.

In response to the continued COVID-19 pandemic, on July 9, 2020, the Company entered into the Second Amendment to the Credit and Guaranty Agreement. This amendment provides the Company with additional flexibility to effectively manage any potential borrower distress related to COVID-19 that were not originally contemplated in loan documentation.

The Credit Agreement contains affirmative and negative covenants binding the Company and its subsidiaries that are customary for credit facilities of this type, including, but not limited to: minimum asset coverage ratio; minimum unencumbered assets ratio; maximum total net leverage ratio; minimum tangible net worth; and an interest charge coverage ratio. As of March 31, 2021 and December 31, 2020 we were in compliance with these covenants. If the duration of the COVID-19 pandemic continues to prolong, its impact on our borrowers and their tenants could result in a sustained deterioration in a material amount of assets and may impact these covenants.

The Credit Agreement contains events of default that are customary for facilities of this type, including, but not limited to, nonpayment of principal, interest, fees and other amounts when due, violation of covenants, cross default with material indebtedness, and change of control.

See Note 16 for additional information related to the Secured Term Loan.

NOTE 7 - MSRs

As of March 31, 2021, the Company retained the servicing rights associated with an aggregate principal balance of $152,465,708 of residential mortgage loans that the Company had previously transferred to residential mortgage loan securitization trusts. The Company’s MSRs are held and managed at the Company’s TRS, and the Company employs two licensed sub-servicers to perform the related servicing activities.

The following table presents the Company’s MSR activity for the three months ended March 31, 2021 and the three months ended March 31, 2020:
 March 31, 2021March 31, 2020
Balance at beginning of period$919,678 $2,700,207 
Changes in fair value due to:
Changes in valuation inputs or assumptions used in valuation model167,839 (728,585)
Other changes to fair value(1)
(188,294)(149,164)
Balance at end of period$899,223 $1,822,458 
Loans associated with MSRs(2)
$152,465,708 $315,173,382 
MSR values as percent of loans(3)
0.59 %0.58 %
(1)Amounts represent changes due to realization of expected cash flows and prepayment of principal of the underlying loan portfolio.
(2)Amounts represent the unpaid principal balance of loans associated with MSRs outstanding at March 31, 2021 and March 31, 2020, respectively.
(3)Amounts represent the carrying value of MSRs at March 31, 2021 and March 31, 2020, respectively divided by the outstanding balance of the loans associated with these MSRs

The following table presents the servicing income recorded on the Company’s condensed consolidated statements of operations for the three months ended March 31, 2021 and March 31, 2020:
Three Months Ended
March 31, 2021
Three Months Ended
March 31, 2020
Servicing income, net$124,156 $194,147 
Total servicing income$124,156 $194,147 

NOTE 8 - FAIR VALUE

The following tables summarize the valuation of the Company’s assets and liabilities carried at fair value on a recurring basis within the fair value hierarchy levels as of March 31, 2021 and December 31, 2020:

 March 31, 2021
Quoted prices in
active markets
for identical assets
Level 1
Significant
other observable
inputs
Level 2
Unobservable
inputs
Level 3
Balance as of March 31, 2021
Assets:    
Mortgage servicing rights  899,223 899,223 
Total$ $ $899,223 $899,223 


14



LUMENT FINANCE TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2021
NOTE 8 – FAIR VALUE (Continued)
 December 31, 2020
Quoted prices in
active markets
for identical assets
Level 1
Significant
other observable
inputs
Level 2
Unobservable
inputs
Level 3
Balance as of
December 31, 2020
Assets:    
Mortgage servicing rights  919,678 919,678 
Total$ $ $919,678 $919,678 

As of March 31, 2021 and December 31, 2020, the Company had $899,223 and $919,678, respectively, in Level 3 assets. The Company’s Level 3 assets are comprised of MSRs. For more detail about Level 3 assets, also see Notes 2 and 7.

The following table provides quantitative information about the significant unobservable inputs used in the fair value measurement of the Company’s MSRs classified as Level 3 fair value assets at March 31, 2021 and December 31, 2020:
As of March 31, 2021
Valuation TechniqueUnobservable InputRangeWeighted Average
Discounted cash flowConstant prepayment rate
10.0 - 28.7%
18.5 %
 Discount rate12.0 %12.0 %

As of December 31, 2020
Valuation TechniqueUnobservable InputRangeWeighted Average
Discounted cash flowConstant prepayment rate
12.4 - 28.0%
21.6 %
 Discount rate12.0 %12.0 %
As discussed in Note 2, GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the condensed consolidated balance sheets, for which it is practicable to estimate that value. The following table details the carrying amount, face amount and fair value of the financial instruments described in Note 2:
March 31, 2021
Level in Fair Value HierarchyCarrying ValueFace AmountFair Value
Assets:
Cash and cash equivalents111,717,804 11,717,804 11,717,804 
Restricted cash132,154,188 32,154,188 32,154,188 
Commercial mortgage loans held-for-investment3484,165,249 484,165,249 484,086,679 
Total$528,037,241 $528,037,241 $527,958,671 
Liabilities:
Collateralized loan obligations2409,404,872 411,242,221 410,864,162 
Secured Term Loan339,598,532 40,250,000 44,361,328 
Total$449,003,404 $451,492,221 $455,225,490 

December 31, 2020
Level in Fair Value HierarchyCarrying ValueFace AmountFair Value
Assets:
Cash and cash equivalents111,375,960 11,375,960 11,375,960 
Restricted cash