FAIR VALUE (Tables)

3 Months Ended

Mar. 31, 2019

Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis


	At
	March 31,		Fair Value Measurements
(in thousands)	2019		Level 1		Level 2		Level 3
Assets:
Investments in debt securities	$	81,102	$	─	$	─	$	81,102
Derivative instruments		3,873		─		3,097		776


	At
	December 31,		Fair Value Measurements
(in thousands)	2018		Level 1		Level 2		Level 3
Assets:
Investments in debt securities	$	97,190	$	─	$	─	$	97,190
Derivative instruments		5,797		─		4,667		1,130

Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation

Changes in the fair value of assets and liabilities that are measured at fair value on a recurring basis and that are categorized as Level 3 within the fair value hierarchy are attributed in the following table to identified activities that occurred during the three months ended March 31, 2019:


	Investments
	in Debt		Derivative
(in thousands)	Securities		Assets
Balance, January 1, 2019	$	97,190	$	1,130
Net losses included in earnings		─		(152)
Net change in AOCI (1)		(3,165)		─
Impact from sales/redemptions		(12,590)		─
Impact from settlements (2)		(333)		(202)
Balance, March 31, 2019	$	81,102	$	776

⁽¹⁾

This amount includes the reclassification into the Consolidated Statements of Operations of $3.6 million of net fair value gains related to bonds that were sold or redeemed during this reporting period. This decline was partially offset by $0.4 million of net unrealized gains recognized during this reporting period.

⁽²⁾

This impact considers the effect of principal payments received and amortization of cost basis adjustments. Included in this amount is $0.3 million of cumulative transition adjustment to retained earnings that was recognized in connection with the Company’s adoption of ASU No. 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-10): Premium Amortization on Purchased Callable Debt Securities” on January 1, 2019.

The following table provides information about the amount of realized and unrealized (losses) gains that were reported in the Company’s Consolidated Statements of Operations for the three months ended March 31, 2019 related to activity presented in the preceding table:


	Net gains on		Net losses on
(in thousands)	bonds (1)		derivatives (2)
Change in unrealized losses related to assets and liabilities held at March 31, 2019	$	─	$	(72)
Change in unrealized losses related to assets and liabilities held at January 1, 2019, but settled during 2019		─		(80)
Additional realized gains recognized		3,571		148
Total net gains (losses) reported in earnings	$	3,571	$	(4)

⁽¹⁾

Amounts are classified as “Impairments” and “Net gains on bonds” in the Company’s Consolidated Statements of Operations.

⁽²⁾

Amounts are classified as “Net gains on derivatives” in the Company’s Consolidated Statements of Operations.


	Investments
	in Debt		Derivative		Derivative
(in thousands)	Securities		Assets		Liabilities
Balance, January 1, 2018	$	143,604	$	2,347	$	(46)
Net losses included in earnings		(6)		(97)		(2)
Net change in AOCI (1)		(3,482)		─		─
Impact from deconsolidation		17,997		─		─
Impact from settlements (2)		(289)		─		─
Balance, March 31, 2018	$	157,824	$	2,250	$	(48)

⁽¹⁾

This amount represents $3.4 million of net unrealized holding losses recognized during the period, as well as the reclassification into the Consolidated Statements of Operations of $0.1 million of realized bond gains related to a bond that was OTTI.

⁽²⁾

This impact considers the effect of principal payments received and amortization of cost basis adjustments.

The following table provides information about the amount of realized and unrealized (losses) gains that were reported in the Company’s Consolidated Statements of Operations for the three months ended March 31, 2018 related to activity presented in the preceding table:



	Net losses on		Net gains on
(in thousands)	bonds (1)		derivatives (2)
Change in unrealized losses related to assets and liabilities held at March 31, 2018	$	(6)	$	(99)
Additional realized gains recognized		─		645
Total net (losses) gains reported in earnings	$	(6)	$	546

⁽¹⁾

Amounts are classified as “Impairments” in the Company’s Consolidated Statements of Operations.

⁽²⁾

Amounts are classified as “Net (losses) gains on derivatives” in the Company’s Consolidated Statements of Operations.

Fair Value Measurements By Level 3 Valuation Technique

Fair Value Measurement at March 31, 2019

Significant

Valuation

Unobservable

Weighted

(dollars in thousands)

Fair Value

Techniques

Inputs (1)

Range (1)

Average (2)

Recurring Fair Value Measurements:

Investments in debt securities:

Multifamily tax-exempt bonds

Performing

29,982

Discounted cash flow

Market yield

4.4 - 4.5

4.5

Non-performing

15,187

Discounted cash flow

Market yield

7.6

N/A

Capitalization rate

6.2

N/A

NOI annual growth rate

0.3

N/A

Contract price

13,500

N/A

Subordinated cash flow

10,361

Discounted cash flow

Market yield

7.5 - 7.8

7.6

Capitalization rate

6.3 - 6.6

6.5

NOI annual growth rate

0.5 - 0.8

0.7

Infrastructure bond

25,572

Discounted cash flow

Market yield

7.0

N/A

Derivative instruments:

Total return swaps

776

Discounted cash flow

Market yield

4.8

N/A

⁽¹⁾

Unobservable inputs reflect information that is not based upon independent sources that are readily available. These inputs are based upon assumptions and internally generated data made by the Company, which may include significant judgment that has been developed based upon available information from third-party sources or dealers about what a market participant would use in valuing the asset.

⁽²⁾

Weighted-averages are calculated using outstanding UPB for cash instruments, such as loans and securities, and notional amounts for derivative instruments.

Fair Value Measurement at December 31, 2018

Significant

Valuation

Unobservable

Weighted

(dollars in thousands)

Fair Value

Techniques

Inputs (1)

Range (1)

Average (2)

Recurring Fair Value Measurements:

Investments in debt securities:

Multifamily tax-exempt bonds

Performing

48,221

Discounted cash flow

Market yield

4.4 - 6.8

4.8

Non-performing

12,882

Discounted cash flow

Market yield

8.2

N/A

Capitalization rate

7.0

N/A

Valuation technique
weighting factors:

• NOI annual growth
rate (10% weighting
factor)

0.5

N/A

• Contract price
(90% weighting
factor)

13,500

N/A

Subordinated cash flow

11,114

Discounted cash flow

Market yield

7.4 - 7.6

7.5

Capitalization rate

6.2 - 6.5

6.4

NOI annual growth rate

0.6 - 0.7

0.7

Infrastructure bond

24,973

Discounted cash flow

Market yield

7.2

N/A

Derivative instruments:

Total return swaps

1,130

Discounted cash flow

Market yield

4.7 - 4.8

4.8

⁽¹⁾

⁽²⁾

Weighted-averages are calculated using outstanding UPB for cash instruments, such as loans and securities, and notional amounts for derivative instruments.

Fair Value, by Balance Sheet Grouping

March 31, 2019

Carrying

Fair Value

(in thousands)

Amount

Level 1

Level 2

Level 3

Assets:

Cash and cash equivalents

28,773

─

Restricted cash

5,668

─

Loans held for investment

67,299

─

68,280

Liabilities:

Notes payable and other debt - bond related

31,637

─

31,658

Notes payable and other debt - non-bond related

11,439

─

10,886

Subordinated debt issued by MFH

97,163

─

50,137

December 31, 2018

Carrying

Fair Value

(in thousands)

Amount

Level 1

Level 2

Level 3

Assets:

Cash and cash equivalents

28,243

─

Restricted cash

5,635

─

Loans held for investment

67,299

─

66,339

Liabilities:

Notes payable and other debt - bond related

39,255

─

39,289

Notes payable and other debt - non-bond related

12,210

─

11,479

Subordinated debt issued by MFH

97,722

─

46,778