FAIR VALUE (Tables)

9 Months Ended

Sep. 30, 2019

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


	At
	September 30,		Fair Value Measurements
(in thousands)	2019		Level 1		Level 2		Level 3
Assets:
Investments in debt securities	$	34,121	$	─	$	─	$	34,121
Derivative instruments		574		─		574		─

Liabilities:
Derivative instruments	$	324	$	─	$	324	$	─


	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 September 30, 2019:


	Investments in
(in thousands)	Debt Securities
Balance, July 1, 2019	$	35,236
Net change in AOCI (1)		(890)
Impact from sales or redemptions		(264)
Impact from settlements (2)		39
Balance, September 30, 2019	$	34,121

⁽¹⁾

This amount includes the reclassification into the Consolidated Statements of Operations of $1.9 million of net fair value gains related to bonds that were sold or redeemed during this reporting period. This decline was partially offset by $1.0 million of net unrealized gains recognized during this reporting period in connection with the Company’s bond investments.

⁽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 gains that were reported in the Company’s Consolidated Statements of Operations for the three months ended September 30, 2019 related to activity presented in the preceding table:


	Net gains on
(in thousands)	bonds (1)
Additional realized gains recognized	$	2,156
Total net gains reported in earnings	$	2,156

⁽¹⁾

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


	Investments
	in Debt		Derivative		Derivative
(in thousands)	Securities		Assets		Liabilities
Balance, July 1, 2018	$	162,261	$	2,747	$	(44)
Net losses included in earnings		─		(158)		(26)
Net change in AOCI (1)		(3,914)		─		─
Impact from sales or redemptions		(10,364)		─		─
Impact from settlements (2)		(175)		─		─
Balance, September 30, 2018	$	147,808	$	2,589	$	(70)

⁽¹⁾

This amount includes the reclassification into the Consolidated Statement of Operations of $5.1 million of net fair value gains related to bonds that were sold or redeemed. This decline was partially offset by (i) $1.0 million of net unrealized holding gains recognized during the period in connection with the Company’s bond investments and (ii) $0.1 million of realized losses that were reclassified out of AOCI and into the Consolidated Statements of Operations in connection with one of the Company’s bond investments that was assessed as 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 gains that were reported in the Company’s Consolidated Statements of Operations for the three months ended September 30, 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 September 30, 2018	$	─	$	(184)
Additional realized gains recognized		5,080		605
Total net gains reported in earnings	$	5,080	$	421

⁽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 (losses) gains on derivatives” in the Company’s Consolidated Statements of Operations.


	Investments
	in Debt		Derivative
(in thousands)	Securities		Assets
Balance, January 1, 2019	$	97,190	$	1,130
Net losses included in earnings		─		(195)
Net change in AOCI (1)		(25,118)		─
Impact from sales or redemptions		(37,633)		─
Impact from settlements (2)		(318)		(935)
Balance, September 30, 2019	$	34,121	$	─

⁽¹⁾

This amount represents the reclassification into the Consolidated Statements of Operations of $26.1 million of net fair value gains related to bonds that were sold or redeemed during this reporting period. This decline was partially offset by $1.0 million of net unrealized gains recognized during this reporting period in connection with the Company’s bond investments.

⁽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 gains (losses) that were reported in the Company’s Consolidated Statements of Operations for the nine months ended September 30, 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 January 1, 2019, but settled during 2019	$	─	$	(195)
Additional realized gains recognized		26,420		152
Total net gains (losses) reported in earnings	$	26,420	$	(43)

⁽¹⁾

Amounts are classified as “Net gains on bonds” 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.


	Investments
	in Debt		Derivative		Derivative
(in thousands)	Securities		Assets		Liabilities
Balance, January 1, 2018	$	143,604	$	2,347	$	(46)
Net (losses) gains included in earnings		(6)		242		(24)
Net change in AOCI (1)		(2,931)		─		─
Impact from deconsolidation		17,997		─		─
Impact from sales or redemptions		(10,364)		─		─
Impact from settlements (2)		(492)		─		─
Balance, September 30, 2018	$	147,808	$	2,589	$	(70)

⁽¹⁾

This amount represents the reclassification into the Consolidated Statements of Operations of $5.1 million of net fair value gains related to bonds that were sold or redeemed during this reporting period. This decline was partially offset by $2.1 million of net unrealized holding gains recognized during the period in connection with the Company’s bond investments.

⁽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 nine months ended September 30, 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) gains related to assets and liabilities held at September 30, 2018	$	(6)	$	218
Additional realized gains recognized		5,080		1,842
Total net gains reported in earnings	$	5,074	$	2,060

⁽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 (losses) gains on derivatives” in the Company’s Consolidated Statements of Operations.

Fair Value Measurements By Level 3 Valuation Technique

Fair Value Measurement at September 30, 2019

Significant

Valuation

Unobservable

Weighted

(dollars in thousands)

Fair Value

Techniques

Inputs (1)

Range (1)

Average

Recurring Fair Value Measurements:

Investments in debt securities:

Multifamily tax-exempt bonds

Subordinated cash flow

8,721

Discounted cash flow

Market yield

7.3

N/A

Capitalization rate

6.4

N/A

NOI annual growth rates

0.6

N/A

Contract price

16,100

N/A

Infrastructure Bond

25,400

Discounted cash flow

Market yield

7.1

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.

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 rates

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

September 30, 2019

Carrying

Fair Value

(in thousands)

Amount

Level 1

Level 2

Level 3

Assets:

Cash and cash equivalents

10,837

─

Restricted cash

6,115

─

Loans held for investment

87,267

─

88,279

Liabilities:

Notes payable and other debt - non-bond related

10,295

─

9,738

Subordinated debt issued by MFH

96,045

─

44,238

Revolving credit facility obligations

45,000

─

45,000

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