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EX-31.1 - MMA Capital Holdings, Inc.v222078_ex31-1.htm
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EX-32.1 - MMA Capital Holdings, Inc.v222078_ex32-1.htm
 
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2011
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 Number 001-11981

 
MUNICIPAL MORTGAGE & EQUITY, LLC
(Exact name of registrant as specified in its charter)

 
Delaware
(State or other jurisdiction of incorporation or organization)
52-1449733
(I.R.S. Employer Identification No.)
   
621 East Pratt Street, Suite 600
(443) 263-2900
Baltimore, Maryland
(Registrant's telephone number, including area code)
(Address of principal executive offices)
 
21202
 
 (Zip Code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes o No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
Accelerated filer o
   
Non-accelerated filer o
Smaller reporting company þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
 
There were 40,469,867 shares of common shares outstanding at May 10, 2011.
 
 
 

 
 
Municipal Mortgage & Equity, LLC
 TABLE OF CONTENTS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
3
PART I – FINANCIAL INFORMATION
4
Item 1.
Financial Statements
4
 
(a) Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010
4
 
(b) Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010
5
 
(c) Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2011 and 2010
6
 
(d) Consolidated Statement of Equity for the three months ended March 31, 2011
7
 
(e) Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010
8
 
(f) Notes to the Condensed Consolidated Financial Statements
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
36
 
(a) Liquidity and Capital Resources
36
 
(b) Critical Accounting Policies and New Accounting Standards
41
 
(c) Results of Operations
42
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
47
Item 4.
Controls and Procedures
48
PART II – OTHER INFORMATION
49
Item 1.
Legal Proceedings
49
    Item 1A.   Risk Factors
49
Item 2.
Unregistered Sales and Equity Securities and Use of Proceeds
49
Item 3.
Defaults Upon Senior Securities
49
Item 4.
Removed and Reserved
49
Item 5.
Other Information
49
Item 6.
Exhibits
49
SIGNATURES
S-1
EXHIBIT INDEX
E-1

 
2

 
 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
This 2011 Quarterly Report on Form 10-Q (“Report”) contains forward-looking statements intended to qualify for the safe harbor contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Forward-looking statements often include words such as “may,” “will,” “should,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “seek,” “would,” “could,” and similar words or are made in connection with discussions of future operating or financial performance.
 
Forward-looking statements reflect our management’s expectations at the date of this Report regarding future conditions, events or results.  They are not guarantees of future performance.  By their nature, forward-looking statements are subject to risks and uncertainties.  Our actual results and financial condition may differ materially from what is anticipated in the forward-looking statements.  There are many factors that could cause actual conditions, events or results to differ from those anticipated by the forward-looking statements contained in this Report.  They include the factors discussed in Part I, Item 1A, “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (“2010 Form 10-K”).
 
Readers are cautioned not to place undue reliance on forward-looking statements in this Report or that we make from time to time, and to consider carefully the factors discussed in Part I, Item 1A, “Risk Factors” of the 2010 Form 10-K, in evaluating these forward-looking statements.  We have not undertaken to update any forward-looking statements.
 
 
3

 
 
PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
Municipal Mortgage & Equity, LLC
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
   
March 31,
2011
(Unaudited)
   
December 31,
2010
 
ASSETS
           
Cash and cash equivalents
  $ 34,026     $ 32,544  
Restricted cash
    25,850       24,987  
Bonds available-for-sale (includes $1,172,932 and $1,197,180 pledged as collateral)
    1,199,912       1,231,036  
Loans held for investment, net of allowance for loan losses (includes $20,672 and $53,096 pledged as collateral)
    21,458       53,933  
Loans held for sale (includes $4,340 and $18,024 pledged as collateral)
    5,284       18,989  
Investment in preferred stock (includes $2,000 and $2,000 pledged as collateral)
    36,371       36,371  
Investments in unconsolidated ventures (includes $6,779 and $6,779 pledged as collateral)
    6,837       6,842  
Derivative assets
    6,088       6,812  
Other assets (includes $13,155 and $12,527 pledged as collateral)
    42,038       46,027  
Assets of consolidated funds and ventures:
               
Investments in Lower Tier Property Partnerships
    424,311       436,971  
Other assets
    169,398       165,024  
Total assets of consolidated funds and ventures
    593,709       601,995  
Total assets
  $ 1,971,573     $ 2,059,536  
                 
LIABILITIES AND EQUITY
               
Debt
  $ 1,210,055     $ 1,277,415  
Guarantee obligations
    7,248       7,235  
Accounts payable and accrued expenses
    17,975       18,890  
Derivative liabilities
    18,059       20,153  
Deferred revenue
    1,274       1,290  
Other liabilities
    6,762       6,333  
Liabilities of consolidated funds and ventures:
               
Debt
    3,677       3,709  
Unfunded equity commitments to Lower Tier Property Partnerships
    20,199       20,970  
Other liabilities
    3,055       3,136  
Total liabilities of consolidated funds and ventures
    26,931       27,815  
Total liabilities
  $ 1,288,304     $ 1,359,131  
                 
Commitments and contingencies
               
                 
Equity:
               
Perpetual preferred shareholders’ equity in a subsidiary company, liquidation  preference of $169,000 at March 31, 2011 and $173,000 at December 31, 2010
  $ 164,803     $ 168,686  
Noncontrolling interests in consolidated funds and ventures (net of $1,533 and $1,922 of subscriptions receivable)
    561,990       569,556  
Common shareholders’ equity:
               
Common shares, no par value (40,204,892 and 40,204,049 shares issued and outstanding and 862,558 and 647,782 non-employee directors’ and employee deferred shares issued at March 31, 2011 and December 31, 2010, respectively)
    (134,433 )     (130,466 )
Accumulated other comprehensive income
    90,909       92,629  
Total common shareholders’ equity (deficit)
    (43,524 )     (37,837 )
Total equity
    683,269       700,405  
Total liabilities and equity
  $ 1,971,573     $ 2,059,536  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
4

 
 
Municipal Mortgage & Equity, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
 
   
For the three months ended 
March 31,
 
   
2011
   
2010
 
REVENUE
           
Interest income:
           
Interest on bonds
  $ 20,822     $ 21,120  
Interest on loans
    1,011       2,111  
Interest on short-term investments
    30       33  
Total interest income
    21,863       23,264  
                 
Fee and other income:
               
Syndication fees
    16       490  
Asset management and advisory fees
    283       335  
Income on preferred stock investment
    1,557       1,671  
Other income
    488       1,134  
Total fee and other income
    2,344       3,630  
                 
Revenue from consolidated funds and ventures
    560       591  
Total revenue
    24,767       27,485  
                 
EXPENSES
               
Interest expense
    15,098       18,077  
Salaries and benefits
    3,069       3,416  
General and administrative
    1,353       2,619  
Professional fees
    3,181       3,711  
Impairment on bonds
    3,510       6,434  
Provision for loan losses
    565       3,467  
Other expenses
    802       2,182  
Expenses from consolidated funds and ventures
    5,339       5,114  
Total expenses
    32,917       45,020  
                 
Net (losses) gains on sale of bonds
    (321 )     366  
Net (losses) gains on loans
    (170 )     3,017  
Net losses on derivatives
    (71 )     (1,867 )
Net gains on early extinguishments of liabilities
    293       6,866  
Equity in (losses) earnings from unconsolidated ventures
    (6 )     1  
Equity in losses from Lower Tier Property Partnerships of consolidated funds and ventures
    (7,873 )     (12,291 )
Loss from continuing operations before income taxes
    (16,298 )     (21,443 )
Income tax (expense) benefit
    (112 )     16  
(Loss) income from discontinued operations, net of tax
    (110 )     29  
Net loss
    (16,520 )     (21,398 )
(Income) loss allocable to noncontrolling interests:
               
Income allocable to perpetual preferred shareholders of a subsidiary company
    (2,442 )     (2,466 )
Net losses allocable to noncontrolling interests in consolidated funds and ventures:
               
Related to continuing operations
    14,266       13,779  
Related to discontinued operations
          51  
Net loss to common shareholders
  $ (4,696 )   $ (10,034 )
                 
Basic and diluted loss per common share:
               
Loss per common share
  $ (0.11 )   $ (0.25 )
Weighted-average common shares outstanding
    40,855       40,369  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
5

 

Municipal Mortgage & Equity, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands)
 
   
For the three months ended 
March 31,
 
   
2011
   
2010
 
             
Net loss
  $ (16,520 )   $ (21,398 )
                 
Other comprehensive income (loss) allocable to common shareholders:
               
Unrealized gains (losses) on bonds available-for-sale:
               
Unrealized net holding losses arising during the period
    (4,067 )     (2,415 )
Reversal of unrealized gains on sold/redeemed bonds
    (888 )     (417 )
Reclassification of unrealized losses to operations
    3,510       6,434  
Total unrealized (losses) gains on bonds available-for-sale
    (1,445 )     3,602  
Currency translation adjustment
    (275 )     506  
Other comprehensive (loss) income allocable to common shareholders
    (1,720 )     4,108  
                 
Other comprehensive (loss) income allocable to noncontrolling interests:
               
Currency translation adjustment
    (2,361 )     16  
                 
Comprehensive loss
  $ (20,601 )   $ (17,274 )
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
  
 
6

 
 
Municipal Mortgage & Equity, LLC
CONSOLIDATED STATEMENT OF EQUITY
For the three months ended March 31, 2011
(Unaudited)
(in thousands)
 
 
Common Shares
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Common
Shareholders’
Equity
(Deficit)
   
Perpetual
Preferred
Shareholders’ 
Equity
   
Noncontrolling
Interest in
Consolidated
Funds and
Ventures
   
Total
Equity
 
 
Number
   
Amount
                               
                                         
Balance, December 31, 2010
  40,851     $ (130,466 )   $ 92,629     $ (37,837 )   $ 168,686     $ 569,556     $ 700,405  
Net (loss) income
        (4,696 )           (4,696 )     2,442       (14,266 )     (16,520 )
Other comprehensive loss
              (1,720 )     (1,720 )           (2,361 )     (4,081 )
Distributions
                          (2,442 )           (2,442 )
Common, restricted and deferred shares issued under employee and non-employee director share plans
  216       26             26                   26  
Preferred share repurchases
        703             703       (3,883 )           (3,180 )
Contributions
                                9,061       9,061  
Balance, March 31, 2011
  41,067     $ (134,433 )   $ 90,909     $ (43,524 )   $ 164,803     $ 561,990     $ 683,269  
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
7

 

Municipal Mortgage & Equity, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

 
   
For the three months ended
March 31,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (16,520 )   $ (21,398 )
Less net loss attributable to noncontrolling interests
    (11,824 )     (11,364 )
Net loss to common shareholders
    (4,696 )     (10,034 )
Adjustments to reconcile net loss to common shareholders to net cash provided by operating activities:
               
Net losses (gains) on sales of bonds and loans
    491       (3,384 )
Net gains on sales of real estate
    (2 )     (205 )
Provisions for credit losses and impairment
    7,802       12,643  
Equity in losses, net from equity investments
    7,870       12,290  
Net losses allocable to noncontrolling interests from consolidated funds and ventures
    (14,266 )     (13,830 )
Income allocable to perpetual preferred shareholders of a subsidiary company
    2,442       2,466  
Purchases, advances on and originations of loans held for sale
    (106 )     (12 )
Principal payments and sales proceeds received on loans held for sale
    152       4,499  
Federal income tax refund
          7,694  
Other
    4,938       4,479  
Net cash provided by operating activities
    4,625       16,606  
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Principal payments and sales proceeds received on bonds
    24,931       9,463  
Principal payments received on loans held for investment
    45,495       1,318  
Investments in property partnerships
    (5,200 )     (14,622 )
Increase in restricted cash and cash of consolidated funds and ventures
    (2,526 )     (10,297 )
Other
    75       293  
Net cash provided by (used in) investing activities
    62,775       (13,845 )
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net proceeds from borrowing activity
    35       10,374  
Repayment of borrowings
    (69,387 )     (24,399 )
Payment of debt issue costs
    (5 )     (544 )
Contributions from holders of noncontrolling interests
    9,061       12,781  
Distributions paid to perpetual preferred shareholders of a subsidiary company
    (2,442 )     (2,466 )
Repurchase and retirement of perpetual preferred shares
    (3,180 )      
Net cash used in financing activities
    (65,918 )     (4,254 )
                 
Net increase (decrease) in cash and cash equivalents
    1,482       (1,493 )
Unrestricted cash and cash equivalents at beginning of period
    32,544       18,084  
Unrestricted cash and cash equivalents at end of period
  $ 34,026     $ 16,591  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
8

 

Municipal Mortgage & Equity, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS– (continued)
(Unaudited)
(in thousands)
 
   
For the three months ended
March 31,
 
   
2011
   
2010
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
           
Interest paid
  $ 12,546     $ 14,277  
Income taxes paid
    18       22  
                 
Non-cash investing and financing activities:
               
Unrealized (losses) gains included in other comprehensive income
    (4,081 )     4,124  
Debt and liabilities extinguished through sales and collections on bonds
    925       26,035  
Decrease in unfunded commitments for equity investments
    771       12,481  
Debt assumed upon acquisition of interests in securitization trusts
          634  
Assets received in troubled debt restructuring
          9,450  
Increase in assets due to initial consolidation of funds and ventures
          45,692  
Increase in liabilities and noncontrolling interests due to initial consolidation of funds and ventures
          45,692  
Decrease in assets due to deconsolidation of funds and ventures
          29,141  
Decrease in liabilities and noncontrolling interests due to deconsolidation of funds and ventures
          25,107  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
9

 

Municipal Mortgage & Equity, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
NOTE 1—DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
 
Except as expressly indicated or unless the context otherwise requires, the “Company,” “MuniMae,” “we,” “our” or “us” means Municipal Mortgage & Equity, LLC, a Delaware limited liability company, and its majority owned subsidiaries.
 
Business, Going Concern and Liquidity Issues
 
Beginning in the second half of 2007, the capital markets in which the Company operates began to deteriorate, which restricted the Company’s access to capital.  This lack of liquidity resulted in the Company having to sell assets, liquidate collateral positions, post additional collateral, sell or close different business segments and work with its creditors to restructure or extend debt arrangements.  Although the Company has been able to extend, restructure and obtain forbearance agreements on various debt and interest rate swap agreements, such that none of our obligations have been accelerated at present, most of these extensions, restructurings and forbearance agreements are short-term in nature and do not provide a viable long-term solution to the Company’s liquidity issues.
 
The Company plans to continue to work with its capital partners to extend debt maturities, restructure debt payments or settle debt at amounts below the contractual amount due.  In addition, the Company will have to continue to reduce its operating costs in order to be a sustainable business.  All of these actions are being pursued in order to achieve the objective of the Company continuing operations.  However, the success of management’s objective is dependent on obtaining creditor concessions, liquidating non-bond related assets and generating sufficient bond portfolio net interest income that can be used to service the Company’s non-bond related debt and the Company’s on-going operating expenses.  There can be no assurance that management will be successful in addressing the Company’s liquidity issues.  More specifically, there is uncertainty as to whether management will be able to restructure or settle its non-bond debt in a sufficient manner to allow the Company’s cash flow to support its operations.
 
The Company’s ability to restructure its debt is especially important with respect to our subordinated debentures. The weighted average pay rate on $196.7 million (unpaid principal balance) of subordinated debentures was 2.08% at March 31, 2011. Our pay rates are due to increase, beginning in the first quarter of 2012, to a weighted average rate of approximately 8.6%. We do not currently have the liquidity to meet these increased payments. In addition, substantially all of our assets are encumbered, which limits our ability to increase our liquidity by selling assets or incurring additional indebtedness. There is also uncertainty related to the Company’s ability to liquidate non-bond related assets at sufficient amounts to satisfy associated debt and other obligations and there are a number of business risks surrounding the Company’s bond investing activities that could impact the Company’s ability to generate sufficient cash flow from the bond portfolio. These uncertainties could adversely impact the Company’s financial condition or results of operations. In the event management is not successful in restructuring or settling its remaining non-bond related debt, or in generating liquidity from the sale of non-bond related assets or if the bond portfolio net interest income and the common equity distributions the Company receives from its subsidiaries are substantially reduced, the Company may have to consider seeking relief through a bankruptcy filing. Collectively, these factors raise substantial doubt about the Company’s ability to continue as a going concern.
 
The Company’s primary business is the bond business, which consists of investments in tax-exempt bonds secured by affordable housing properties.  Substantially all of the Company’s operating cash flow is from the Company’s bond portfolio, which is generated by subsidiaries of the Company that hold substantially all of the Company’s bonds.  These subsidiaries have certain compliance requirements that may limit or restrict their ability to distribute cash to MuniMae.  One of these subsidiaries is MuniMae TE Bond Subsidiary, LLC (“TEB”), which holds 90.4% of the carrying value of the Company’s bonds at March 31, 2011.  The Company indirectly owns all of TEB’s common stock.  TEB’s operating agreement with its preferred shareholders contains covenants restricting the type of assets in which TEB can invest, the incurrence of leverage, the issuance of additional preferred equity interests, as well as cash distributions to MuniMae and imposing certain requirements in the event of merger, sale or consolidation.  In 2010, TEB retained $25.0 million of cash flows (“Retained Distributions”) by limiting Distributable Cash Flow distributions to MuniMae pursuant to a March 25, 2010 amendment to its operating agreement.  At March 31, 2011:
 
 
·
TEB’s leverage ratio was 59.3%, which was effectively at the incurrence limit of 60%;
 
 
·
TEB’s liquidation preference ratios were at amounts that would restrict it from raising additional preferred equity on parity with the existing preferred shares outstanding; and
 
 
·
TEB’s ability to distribute cash to MuniMae was and continues to be limited to Distributable Cash Flows (TEB’s net income adjusted to exclude the impact of non-cash items) and TEB does not have the ability to make redemptions of common stock or distributions to MuniMae other than Distributable Cash Flows (“Restricted Payments”) because the current liquidation preference ratios prohibit it.
 
 
10

 
 
Total common shareholder distributions from TEB for the three months ended March 31, 2011 and 2010 were $9.2 million and $2.5 million, respectively.
 
All of TEB’s common stock is pledged by the Company to a creditor to support collateral requirements related to certain debt and derivative agreements.  On December 8, 2010, the Company entered into a forbearance agreement with this creditor (“Counterparty”) which restricted the Company’s ability to utilize common distributions from TEB.  The key provisions of this agreement are as follows:
 
 
·
Forbearance from the minimum net asset value requirement and the financial reporting requirement contained in the interest rate swap agreements until the earlier of June 30, 2012 or when TEB regains compliance with the leverage and liquidation incurrence ratios.
 
 
·
The Company must post a portion of the distributions it receives on TEB’s common stock as follows:
 
 
o
For quarterly distributions beginning in the fourth quarter of 2010 and continuing through to the third quarter of 2011, the Company will post restricted distributions equal to 50% of common distributions, less $0.8 million.
 
 
o
For quarterly distributions beginning in the fourth quarter of 2011 and continuing until TEB is in compliance with both its leverage ratio and liquidation preference ratio, the Company will post restricted distributions equal to 50% of common distributions.  Once TEB is in compliance with its leverage ratio and liquidation preference ratios there will be no restrictions on common distributions.
 
The restricted distributions have been and are expected to be utilized by the Company to purchase and retire various preferred shares issued by TEB.
 
TEB’s common stock is wholly owned by MuniMae TEI Holdings, LLC (“TEI”), which is ultimately wholly owned by MuniMae.  TEI’s ability to remit cash to MuniMae for liquidity needs outside of TEI may be restricted due to minimum liquidity and net worth requirements related to a TEI debt agreement.  The most restrictive covenant requires TEI to maintain a minimum net worth of $125 million.  At March 31, 2011, TEI’s net worth was $163.4 million.
 
Basis of Presentation and Significant Accounting Policies
 
The accompanying condensed consolidated financial statements represent the consolidation of Municipal Mortgage & Equity, LLC and all companies that we directly or indirectly control, either through majority ownership or otherwise.  See Note 1, “Description of the Business and Basis of Presentation” to the consolidated financial statements in our 2010 Form 10-K, which discusses our consolidation presentation and our significant accounting policies.
Use of Estimates
The preparation of the Company’s financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, commitments and contingencies and revenues and expenses.  Management has made significant estimates in certain areas, including the determination of fair values for bonds, loans held for sale (“HFS”), derivative financial instruments, guarantee obligations, and certain other assets and liabilities of consolidated funds and ventures.  Management has made significant estimates in the determination of impairment on bonds, loans and real estate investments.  Actual results could differ materially from these estimates.
 
Interim Period Presentation
 
The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and note disclosures normally included in annual financial statements prepared in accordance with United States generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.
 
The condensed consolidated financial statements are unaudited.  These statements include all adjustments (consisting of normal recurring accruals) that we considered necessary to present a fair statement of our results of operations, financial position and cash flows.  These condensed consolidated financial statements should be read in conjunction with the financial statements included in our 2010 Form 10-K.  The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.
 
 
11

 
 
NOTE 2—BONDS AVAILABLE-FOR-SALE
 
Bonds available-for-sale includes mortgage revenue bonds and other bonds.
 
Mortgage Revenue Bonds
 
Mortgage revenue bonds are issued by state and local governments or their agencies or authorities to finance multifamily housing; however, the only source of recourse on these bonds is the collateral, which is a first mortgage or a subordinate mortgage on the underlying properties.  For subordinate mortgages, the payment of debt service on the bonds occurs only after payment of senior obligations which have priority to the cash flow of the underlying collateral.  The Company’s subordinate bonds had an aggregate fair value of $46.6 million and $40.2 million at March 31, 2011 and December 31, 2010, respectively.  The Company’s rights under the mortgage revenue bonds are defined by the contractual terms of the underlying mortgage loans, which are pledged to the bond issuer and assigned to a trustee for the benefit of bondholders to secure the payment of debt service (any combination of interest and/or principal as laid out in the trust indenture) on the bonds.  The mortgage loans are not assignable unless the bondholder has consented.
 
Mortgage revenue bonds can be non-participating or participating.  Participating mortgage revenue bonds allow the Company to receive additional interest from net property cash flows in addition to the base interest rate.  Both the stated and participating interest on the Company’s mortgage revenue bonds are exempt from federal income tax, although this income may be included as part of a taxpayer’s alternative minimum tax for federal income tax purposes.  The Company’s participating mortgage revenue bonds had an aggregate fair value of $53.6 million and $52.9 million at March 31, 2011 and December 31, 2010, respectively.
 
Other Bonds
 
Other bonds are primarily municipal bonds issued by community development districts or other municipal issuers to finance the development of community infrastructure supporting single-family housing and mixed-use and commercial developments such as storm water management systems, roads and community recreational facilities.  In some cases these bonds are secured by specific payments or assessments pledged by the community development districts that issue the bonds or incremental tax revenue generated by the underlying properties.
 
Principal payments on bonds are based on amortization tables set forth in the bond documents.  If no principal amortization is required during the bond term, the outstanding principal balance is required to be paid in a lump sum payment at maturity or at such earlier time as defined under the bond documents.  The bonds typically contain provisions that prohibit prepayment of the bond for a specified period of time.
 
The following table summarizes the investment in bonds and the related unrealized losses and unrealized gains at March 31, 2011 and December 31, 2010:
 
   
March 31, 2011
 
(in thousands)
 
Unpaid
Principal
Balance
   
Basis
Adjustments (1)
   
Unrealized
Losses
   
Unrealized
Gains
   
Fair Value
 
Mortgage revenue bonds
  $ 1,154,839     $ (8,020 )   $ (147,590 )   $ 69,903     $ 1,069,132  
Other bonds
    163,156       (13,190 )     (39,882 )     20,696       130,780  
Total
  $ 1,317,995     $ (21,210 )   $ (187,472 )   $ 90,599     $ 1,199,912  

   
December 31, 2010
 
(in thousands)
 
Unpaid
Principal
Balance
   
Basis
Adjustments (1)
   
Unrealized
Losses
   
Unrealized
Gains
   
Fair Value
 
Mortgage revenue bonds
  $ 1,196,695     $ (7,852 )   $ (145,684 )   $ 69,883     $ 1,113,042  
Other bonds
    148,793       (13,369 )     (39,590 )     22,160       117,994  
Total
  $ 1,345,488     $ (21,221 )   $ (185,274 )   $ 92,043     $ 1,231,036  

 
(1)
Includes premiums, discounts and deferred costs.
 
 
12

 

Maturity
The following table summarizes, by contractual maturity, the amortized cost and fair value of bonds available-for-sale at March 31, 2011.
   
March 31, 2011
 
(in thousands)
 
Amortized Cost
   
Fair Value
 
Non-Amortizing:
           
Due in less than one year
  $     $  
Due between one and five years
           
Due between five and ten years
           
Due after ten years
    20,152       41,747  
Amortizing:
               
Due at stated maturity dates between December 2013 and June 2056
    1,089,161       1,158,165  
    $ 1,109,313     $ 1,199,912  
 
Bonds with Lockouts, Prepayment Premiums or Penalties
 
Substantially all of the Company’s bonds include provisions that allow the borrowers to prepay the bonds at a premium or at par after a specified date that is prior to the stated maturity date.  The following table provides the amount of bonds that are prepayable without restriction or penalty at March 31, 2011, as well as the year in which the remaining portfolio becomes prepayable without restriction or penalty.
 
   
March 31, 2011
 
(in thousands)
 
Unpaid
Principal
Balance
   
Amortized
Cost
   
Fair Value
 
Bonds that may be prepaid without restrictions or penalties at March 31, 2011
  $ 153,222     $ 120,439     $ 143,188  
April 1 through December 31, 2011
    8,550       7,257       7,413  
2012
    31,219       25,598       26,609  
2013
    16,797       14,905       15,788  
2014
    29,138       28,792       30,048  
Thereafter
    979,562       828,205       881,651  
Bonds that may not be prepaid
    99,507       84,117       95,215  
Total
  $ 1,317,995     $ 1,109,313     $ 1,199,912  

Non-Accrual Bonds
 
The carrying value of bonds on non-accrual was $87.7 million and $83.6 million at March 31, 2011 and December 31, 2010, respectively.  During the period in which these bonds were on non-accrual, the Company recognized interest income, on a cash basis, of $1.4 million and $0.2 million for the three months ended March 31, 2011 and 2010, respectively.
 
Bond Sales
 
The Company recorded cash proceeds on sales and redemptions of bonds of $5.9 million and $0.2 million for the three months ended March 31, 2011 and 2010, respectively.
 
Provided in the table below are unrealized losses and realized gains and losses recorded through “Impairment on bonds” and “Net (losses) gains on bonds” for bonds sold or redeemed during the three months ended March 31, 2011 and 2010, as well as for bonds still in the Company’s portfolio at March 31, 2011 and 2010, respectively.
 
   
For the three months
ended March 31,
 
(in thousands)
 
2011
   
2010
 
Bond impairment recognized on bonds held at each period-end
  $ (3,510 )   $ (6,434 )
Losses recognized at time of sale/redemption
    (1,036 )     (2 )
Gains recognized at time of sale/redemption
    715       368  
Total net losses on bonds
  $ (3,831 )   $ (6,068 )

 
Unfunded Bond Commitments
 
Unfunded bond commitments are agreements to fund construction or renovation of properties securing the bonds over the construction or renovation period.  At March 31, 2011 and December 31, 2010, there were no unfunded bond commitments.
 
 
13

 
 
NOTE 3—LOANS HELD FOR INVESTMENT AND LOANS HELD FOR SALE
 
The Company disaggregates its lending portfolio into four categories: construction, permanent, bridge and other loans, defined as follows.
 
Construction loans are short-term or interim financing provided primarily to builders and developers of multifamily housing and other property types for the construction and lease-up of the property.
 
Permanent loans are used to pay off the construction loans upon the completion of construction and lease-up of the property or to refinance existing stabilized properties.
 
Bridge loans are short-term or intermediate term loans secured with either a first mortgage position or a subordinated position.  These loans are used primarily to finance the acquisition and improvements on transitional properties until their conversion to permanent financing.
 
Other loans are primarily pre-development loans and land or land development loans.  Pre-development loans are loans to developers to fund up-front costs to help them secure a property before they are ready to fully develop it.  Land or land development loans are used to fund the purchase or the purchase and costs of utilities, roads and other infrastructure and are typically repaid from lot sales.
 
See Note 17, “Consolidated Funds and Ventures,” for discussion of the Company’s loans related to consolidated funds and ventures.
 
Loans Held for Sale
 
The following table summarizes the cost basis of loans held for sale by loan type and the lower of cost or market (“LOCOM”) adjustment to record these loans at the lower of cost or market at March 31, 2011 and December 31, 2010:
 
(in thousands)
 
March 31,
2011
   
December 31,
2010
 
Construction
  $     $ 5,601  
Permanent
    12,663       20,647  
Bridge
    1,793       1,793  
Other
    714       640  
      15,170       28,681  
LOCOM Adjustment
    (9,886 )     (9,692 )
Loans held for sale, net
  $ 5,284     $ 18,989  

Outstanding loan balances include unearned income and net deferred fees of $0.4 million at March 31, 2011 and December 31, 2010.
 
The carrying value of non-accrual loans was $0.7 million at March 31, 2011 and December 31, 2010.
 
The Company recorded cash proceeds on loan sales and pay-offs of $13.6 million and $5.4 million and corresponding net gains on loan sales and pay-offs of $0.1 million and losses of $0.2 million for the three months ended March 31, 2011 and 2010, respectively.
 
The following table summarizes the activity in LOCOM adjustments (all reported through continuing operations) for the three months ended March 31, 2011 and 2010:
   
For the three months ended
March 31,
 
(in thousands)
 
2011
   
2010
 
Balance-January 1,
  $ 9,692     $ 32,582  
LOCOM adjustments
    194       (208 )
Recoveries and (charge-offs), net
          (18,356 )
Balance-March 31,
  $ 9,886     $ 14,018  
 
 
14

 
 
Loans Held for Investment
 
The following table summarizes loans held for investment (“HFI”) by loan type at March 31, 2011 and December 31, 2010:
 
(in thousands)
 
March 31,
2011
   
December 31,
2010
 
Construction
  $     $ 31,776  
Permanent
    8,980       9,048  
Bridge
    27,154       27,177  
Other
    19,602       19,645  
      55,736       87,646  
Allowance for loan losses
    (34,278 )     (33,713 )
Loans held for investment, net
  $ 21,458     $ 53,933  
 
Outstanding loan balances include unearned income and net deferred fees of $0.4 million at March 31, 2011 and December 31, 2010.
 
The carrying value of non-accrual loans was $7.5 million at March 31, 2011 and December 31, 2010.  At March 31, 2011 and December 31, 2010 there were no loans held for investment past due 90 days or more and still accruing interest.
 
The following table provides an aging analysis for the carrying value of loans held for investment at March 31, 2011 and December 31, 2010:
 
(in thousands)
 
March 31,
2011
   
December 31,
2010
 
Total current
  $ 13,997     $ 46,472  
30-59 days past due
           
60-89 days past due
           
Greater than 90 days
    7,461       7,461  

The following table summarizes information about loans held for investment which were specifically identified as impaired at March 31, 2011 and December 31, 2010:
 
(in thousands)
 
March 31,
2011
   
December 31,
2010
 
Impaired loans with a specific reserve
  $ 15,509     $ 9,450  
Impaired loans without a specific reserve (1)
           
Total impaired loans
  $ 15,509     $ 9,450  
                 
Average carrying value of impaired loans
  $ 15,820     $ 9,847  
 
 
(1)
A loan is impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement; however, when the discounted cash flows, collateral value or market price equals or exceeds the carrying value of the loan, the loan does not require a specific reserve.
 
The unpaid principal balance of impaired loans was $52.4 million and $45.0 million at March 31, 2011 and December 31, 2010, respectively.  The Company recognized $0.2 million and $0.1 million, on a cash basis, of interest income on impaired loans for the three months ended March 31, 2011 and 2010, respectively.
 
The following table summarizes the activity in the allowance for loan losses for the three months ended March 31, 2011 and 2010:
   
For the three months ended
March 31,
 
(in thousands)
 
2011
   
2010
 
Balance-January 1,
  $ 33,713     $ 29,238  
Provision for loan losses
    565       3,467  
(Charge-offs) and recoveries, net
          35  
Balance-March 31,
  $ 34,278     $ 32,740  

 
15

 
 
Unfunded Loan Commitments
 
Unfunded loan commitments are agreements to fund construction or renovation of properties securing certain loans.  At March 31, 2011 and December 31, 2010, the total unfunded loan commitments for performing HFI loans were $0.3 million.  There were no outstanding unfunded commitments for performing HFS loans at March 31, 2011 and December 31, 2010.
 
There were no commitments to lend additional funds to borrowers whose loans were impaired at March 31, 2011 and December 31, 2010.
 
NOTE 4—INVESTMENTS IN PREFERRED STOCK
 
As partial consideration for the Company’s sale of its Agency Lending business, on May 15, 2009, the Company received three series of preferred stock from the purchaser with a par amount of $47.0 million: Series A Preferred units of $15.0 million, Series B Preferred units of $15.0 million and Series C Preferred units of $17.0 million, which entitles the Company to receive cumulative quarterly cash distributions at annualized rates of 17.5%, 14.5% and 11.5%, respectively.  As part of the Company’s sale of its Agency Lending business, the Company agreed to reimburse the purchaser up to a maximum of $30.0 million over the first four years after the sale date (expiring May 15, 2013), for payments the purchaser may be required to make under loss sharing arrangements with the Federal National Mortgage Association (“Fannie Mae”) and other government-sponsored enterprises or agencies with regard to loans they purchased from us.  The Series B and Series C preferred stock agreements have a provision that provides for this loss sharing reimbursement to be satisfied, if necessary, by cancellation of Series C Preferred units and then Series B Preferred units, rather than by cash.  The fair value of the preferred stock on May 15, 2009, the sale date, was estimated at $37.7 million.  This amount includes a $9.3 million reduction against the $47.0 million par amount for the estimated exposure associated with the loss sharing arrangement.  The Company accounts for the preferred stock using the historical cost approach and tests for impairment at each balance sheet date.  An impairment loss is recognized if the carrying amount of the preferred stock is not recoverable and exceeds its fair value.  The carrying value of the preferred stock was $36.4 million at March 31, 2011 and December 31, 2010.  The estimated fair value of the preferred stock was $37.8 million and $37.5 million at March 31, 2011 and December 31, 2010, respectively.  The Company did not record impairment charges on the preferred stock for the three months ended March 31, 2011.  The Company recorded impairment charges on the preferred stock of $0.5 million for the three months ended March 31, 2010.  Since the inception date, the Company cancelled $3.0 million in Series C Preferred units to settle realized losses under the loss sharing arrangement.  In May 2010, pursuant to the Series C agreement, $2.0 million of Series C Preferred units were redeemed as a result of the release of certain of the Company’s letters of credit.
 
The Company is also obligated to fund losses on specific loans identified at the sale date that are not part of the $30.0 million loss reimbursement.  The Company accounts for this obligation as a guarantee obligation and at March 31, 2011 and December 31, 2010 the fair value of this obligation was $0.5 million and $0.4 million, respectively.  See Note 11, “Guarantees and Collateral.”  Since the sale of the Agency Lending business, the Company incurred $1.2 million in realized losses related to these specific loans.
 
NOTE 5—INVESTMENTS IN UNCONSOLIDATED VENTURES
 
The following table summarizes the investments in unconsolidated ventures at March 31, 2011 and December 31, 2010:
 
(in thousands)
 
March 31,
2011
   
December 31,
2010
 
Investments in Real Estate Related Entities
  $ 6,837     $ 6,842  
 
Investments in Real Estate Related Entities
 
The Company has investments in real estate funds or partnerships that invest in debt and equity instruments related to commercial real estate.  In 2010, the Company received a 33.3% interest in a partnership that was formed to take a deed-in-lieu of foreclosure on land that was collateral for a loan held by the Company.  The remaining interest in the partnership is held by a third party who had also loaned money to the developer on the same land parcel.  The interests in the partnership were determined based on the relative loan amounts provided by the Company and the third party lender.  This third party interest holder is the primary beneficiary of the partnership.
 
 
16

 
 
Balance Sheet and Operating Results for the Unconsolidated Ventures
 
The following table displays the total assets and liabilities related to the ventures for which the Company holds an equity investment at March 31, 2011 and December 31, 2010:
 
(in thousands)
 
March 31,
2011
   
December 31,
2010
 
Investments in unconsolidated ventures:
           
Total assets (primarily real estate)
  $ 57,370     $ 66,601  
Total liabilities (primarily debt)
    22,707       22,600  

The following table displays the net income for the three months ended March 31, 2011 and 2010 for the ventures in which the Company holds an equity investment:
 
   
For the three months ended March 31,
 
(in thousands)
 
2011
   
2010
 
Net income
  $ 122     $ 168  

NOTE 6—OTHER ASSETS
 
The following table summarizes other assets at March 31, 2011 and December 31, 2010:
 
(in thousands)
 
March 31,
2011
   
December 31,
2010
 
Other assets:
           
Accrued interest receivable
  $ 8,924     $ 10,793  
Property and equipment, net
    1,313       1,453  
Federal and state tax receivables
    5,157       5,539  
Debt issue costs, net
    10,123       10,349  
Real estate owned
    13,155       13,231  
Other assets
    3,366       4,662  
Total other assets
  $ 42,038     $ 46,027  
 
Property and equipment are recorded at cost, net of accumulated depreciation and amortization, which was $3.8 million at March 31, 2011 and December 31, 2010.  Total depreciation expense recorded through continuing operations totaled $0.1 million and $0.2 million for the three months ended March 31, 2011 and 2010, respectively.  Depreciation and amortization are recognized using the straight-line method over the estimated useful lives of the assets, which generally range from five to 15 years, depending on the asset or the lease term for leasehold improvements.
 
Real estate owned represents foreclosed property or properties acquired through a deed in lieu of foreclosure as a result of borrower defaults on their debt owed to the Company.  At March 31, 2011 and December 31, 2010, the Company had two parcels of undeveloped land that had a carrying value of $5.3 million, and a market rate multifamily housing property with a carrying value of $7.8 million and $7.9 million, respectively.
 
NOTE 7—DERIVATIVE FINANCIAL INSTRUMENTS
 
The following table summarizes the Company’s derivative fair value balances at March 31, 2011 and December 31, 2010.
 
   
Fair Value
 
   
March 31, 2011
   
December 31, 2010
 
(in thousands)
 
Assets
   
Liabilities
   
Assets
   
Liabilities
 
                         
Interest rate swaps
  $ 6,071     $ 17,488     $ 6,812     $ 19,561  
Other
    17       571             592  
Total derivative financial instruments
  $ 6,088     $ 18,059     $ 6,812     $ 20,153  
 
The following table summarizes the derivative notional amounts at March 31, 2011 and December 31, 2010.
 
   
Notional
 
(in thousands)
 
March 31,
2011
   
December 31,
2010
 
             
Interest rate swaps
  $ 303,735     $ 303,735  
Other
    19,960       23,974  
 
 
17

 
 
The following table summarizes derivative activity for the three months ended March 31, 2011 and 2010.
 
   
Realized/Unrealized Gains
(Losses) Reported Through
Continuing Operations
For the three months ended
March 31,
 
(in thousands)
 
2011
   
2010
 
             
Interest rate swaps (1)
  $     $ (2,499 )
Other
    (71 )     632  
Total
  $ (71 )   $ (1,867 )
 
 
(1)
The cash paid and received on both interest rate swaps and total return swaps is settled on a net basis and recorded through “Net losses on derivatives.”  Net cash paid was $1.4 million and $1.8 million for the three months ended March 31, 2011 and 2010, respectively.
 
Interest Rate Swaps
 
Interest rate swaps are executed to reduce the interest rate risk associated with the variable rate interest on the debt owed to senior interests in securitization trusts.  Under the interest rate swap contracts, the Company typically receives a variable rate and pays a fixed rate.  The rate that the Company receives from the counterparty will generally offset the rate that the Company pays on its debt instruments.  Therefore, interest rate swaps effectively convert variable rate debt to fixed rate debt.  The Company’s interest rate swaps are generally indexed on a variable rate based on the weekly Securities Industry and Financial Markets Association Municipal Swap Index (an index of weekly tax-exempt variable rates (“SIFMA”)) or the London Interbank Offer Rate (“LIBOR”), and the fixed rate is based on SIFMA or LIBOR for the specific term of the swap.
 
All of the Company’s interest rate swap agreements are entered into under the International Swap Dealers Association’s standard master agreements (“ISDAs”), including supplemental schedules and confirmations to these agreements.  At March 31, 2011, the Company had interest rate swap contracts with the Counterparty totaling $303.7 million (notional) with a net fair value obligation of $11.4 million.  The supplemental schedules to the ISDAs require the Company to maintain a minimum net asset value, which the Company has not done.  Without a forbearance agreement, the lack of compliance with this covenant permits the Counterparty to terminate the interest rate swaps.  On December 8, 2010, the Company entered into an amended and restated forbearance agreement with the Counterparty that, among other things, extends the forbearance date to the earlier of June 30, 2012 or when TEB is in compliance with its leverage and liquidation incurrence ratios.
 
 
18

 

 
NOTE 8—DEBT
 
The table below summarizes the Company’s outstanding debt balances, the weighted-average interest rates and term dates at March 31, 2011 and December 31, 2010.
 
(in thousands)
 
March 31,
2011
   
Weighted-Average
Interest Rate at
Period-End
   
December 31,
2010
   
Weighted-Average
Interest Rate at
Period-End
 
                         
Debt related to bond investing activities (1):
                       
Senior interests and debt owed to securitization trusts:
                       
Due within one year (2)
  $           $ 15,985       0.4 %
Due after one year (2)
    729,910       0.7 %     732,115       0.7  
Mandatorily redeemable preferred shares (3):
                               
Due within one year
    5,662       7.5       5,558       7.5  
Due after one year
    122,744       8.5       127,971       8.6  
Notes payable and other debt (4):
                               
Due within one year
    5,654       6.0       5,654       6.0  
Due after one year
    66,859       6.7       68,444       6.7  
Total bond related debt
    930,829               955,727          
                                 
Non-bond related debt:
                               
Notes payable and other debt:
                               
Due within one year
    59,588       7.4       106,520       7.4  
Due after one year
    33,021       10.9       27,267       12.1  
Subordinated debentures (5)
                               
Due after one year
    186,617       8.8       183,711       8.8  
Line of credit facilities:
                               
Due within one year
                4,190       6.0  
Total non-bond related debt
    279,226               321,688          
                                     
Total debt
  $ 1,210,055             $ 1,277,415          
 
 
(1)
Debt related to bond investing activities is debt that is either collateralized or securitized by bonds or other debt obligations of TEB and TEI.
 
 
(2)
The Company also incurs on-going fees related to credit enhancement, liquidity, custodian, trustee and remarketing as well as upfront debt issuance costs, which when added to the weighted average interest rate brings the overall weighted average interest expense (due within one year) to 1.9% December 31, 2010.  These additional fees bring the weighted average interest rate (due after one year) to 1.9% and 2.0% at March 31, 2011 and December 31, 2010, respectively.
 
 
(3)
Included in mandatorily redeemable preferred shares are unamortized discounts of $4.2 million and $4.4 million at March 31, 2011 and December 31, 2010, respectively.
 
 
(4)
Included in notes payable and other debt are unamortized discounts of $1.8 million at March 31, 2011 and December 31, 2010.
 
 
(5)
Included in subordinated debentures are unamortized discounts of $10.1 million and $13.0 million at March 31, 2011 and December 31, 2010, respectively.
 
Senior Interests and Debt Owed to Securitization Trusts
 
The Company securitizes bonds through several programs and under each program the Company transfers bonds into a trust, receives cash proceeds from the sales of the senior interests and retains the subordinated interests.  To increase the attractiveness of the senior interests to investors, the senior interests are credit enhanced or insured by a third party.  Substantially all of the senior interests are variable rate debt.  The residual interests the Company retains are subordinated securities entitled to the net cash flow of each trust after the payment of trust expenses and interest on the senior certificates.  For certain programs, a liquidity provider agrees to acquire the senior certificates upon a failed remarketing.  The senior interest holders have recourse to the third party credit enhancement or insurance, while the credit enhancer or insurance provider has recourse to the bonds deposited in the trusts, the additional collateral pledged, and, in certain cases, to the general recourse of the Company.
 
Mandatorily Redeemable Preferred Shares
 
TEB has mandatorily redeemable preferred shares outstanding.  These shares have quarterly distributions which are payable (based on the stated distribution rate) to the extent of TEB’s net income.  For this purpose, net income is defined as TEB’s taxable income, as determined in accordance with the United States Internal Revenue Code, plus any income that is exempt from federal taxation, but excluding gains from the sale of assets.  In addition to quarterly distributions, the holders of the cumulative mandatorily redeemable preferred shares receive an annual capital gains distribution equal to an aggregate of 10% of any realized net capital gains during the immediately preceding taxable year, if any.  There were no capital gains distributions for the three months ended March 31, 2011 and 2010.
 
 
19

 
 
The table below summarizes the terms of the cumulative mandatorily redeemable preferred shares issued by TEB at March 31, 2011:
   
Issue Date
 
Number
of Shares
   
Liquidation
Amount
Per Share
   
Annual
Distribution
Rate
   
Annual
Aggregate
Distribution and
Redemption Rate
 
Next Remarketing/
Mandatory Tender
Date
 
Mandatory Redemption
Date
                                           
Series A Mandatorily Redeemable Preferred Shares
 
May 27, 1999
    37.5     $ 1,829,523       7.50 %     12.68
June 30, 2011
 
June 30, 2049
                                           
Series B Mandatorily Redeemable Preferred Shares
 
June 2, 2000
    30       2,000,000       9.56       N/A  
November 1, 2011
 
June 30, 2050
                                           
Series B-1 Mandatorily Redeemable Preferred Shares
 
October 9, 2001
    2       2,000,000       9.56       N/A  
November 1, 2011
 
June 30, 2050

The credit ratings of TEB and each series of preferred shares are currently non-investment grade due to credit weaknesses in the multifamily housing sector, required amortization of certain preferred shares, as well as the rollover risk of the Federal Home Loan Mortgage Corporation (“Freddie Mac”) credit facility on bonds that provide revenues to TEB, which expires in 2013.  These credit ratings are not required under TEB’s Operating Agreement and therefore do not change any terms or rights of the preferred shares.
 
On January 24, 2011, the Company repurchased $4.0 million of the original par amount of the 6.80% Series B-1 Subordinate Cumulative Mandatorily Redeemable Preferred Shares at 86.5% of face value and recognized a gain on debt extinguishment of $0.4 million.  On May 4, 2011, the Company repurchased the remaining $4.0 million original par amount of the 6.8% Series B-1 Subordinate Cumulative Mandatorily Redeemable Preferred Shares at 86.5% of face value and recognized a gain on debt extinguishment of $0.4 million.
 
The Series A cumulative mandatorily redeemable preferred shares and the Series A-2, A-3 and A-4 cumulative perpetual preferred shares are all of equal priority.  See Note 13, “Equity,” for the terms related to the perpetual preferred shares.  Series B cumulative mandatorily redeemable preferred shares and the Series B-2 and B-3 cumulative perpetual preferred shares are all of equal priority and are junior to Series A cumulative mandatorily redeemable preferred shares and the Series A-2, A-3, and A-4 cumulative perpetual preferred shares.  Unlike the cumulative mandatorily redeemable preferred shares, the cumulative perpetual preferred shares are included in equity.  See Note 13, “Equity.”
 
The mandatorily redeemable preferred shares are subject to remarketing on the dates specified in the table above.  On the remarketing date, the remarketing agent will seek to remarket the shares at the lowest distribution rate that would result in a resale of the mandatorily redeemable preferred shares at a price equal to par plus all accrued but unpaid dividends, subject to a cap described herein.  If the remarketing agent is unable to successfully remarket these shares, distributions could increase and this increase could adversely impact the Company’s financial condition and results of operations.  More specifically, the aggregate distribution and redemption rate on the Series A shares would continue at 12.68% until there is a remarketing which is not a failed remarketing.  However, the distribution rate on the Series B shares could, at most, be reset to two times the 15 year BAA municipal bond yield if the remarketing on November 1, 2011 were to fail.  On May 12, 2011, two times the 15 year BAA municipal bond yield was 10.7%.
 
Except as described below, the mandatorily redeemable preferred shares are not redeemable prior to the remarketing dates.
 
Each series of mandatorily redeemable preferred shares has been subject to a remarketing event; however, due to market conditions a remarketing of the shares did not occur and the following events occurred on or prior to the remarketing date.
 
 
·
The Series B and B-1 shares were subject to remarketing on November 1, 2010.  The holders of a majority of the outstanding Series B and B-1 shares, voting separately, elected to waive the November 1, 2010 remarketing requirement, effective November 1, 2010, and to increase the distribution rate on the Series B and B-1 shares from 7.75% and 6.8%, respectively, to 9.56% for one year.  The next mandatory remarketing date for the Series B Preferred Shares will occur on November 1, 2011.
 
 
·
Effective June 30, 2009, the Series Exhibit for Series A was amended and restated.  The amendment increased the distribution rate from 6.88% to 7.50% effective July 1, 2009, on the outstanding mandatorily redeemable preferred shares and provided for redemptions of shares beginning in October 31, 2009 and continuing through October 31, 2021, for an annual aggregate distribution and redemption rate of 12.68%.  The holders of a majority of the outstanding Series A shares, voting separately, elected to waive the June 30, 2010 remarketing requirement.  As a result, the next mandatory remarketing date for the Series A Preferred Shares will occur on June 30, 2011.
 
 
20

 
 
Notes Payable and Other Debt
 
This debt is primarily related to secured borrowings collateralized primarily with the Company’s bond assets.  In most cases, the Company has guaranteed the debt or is the direct borrower.
 
Subordinated Debentures
 
The table below represents a summary of the key terms of the subordinated debentures issued by MMA Mortgage Investment Corporation (“MMIC”) and MMA Financial Holdings, Inc. (“MFH”) at March 31, 2011:
 
(dollars in thousands)
                           
Issuer
 
Debenture
Principal
   
Net
Discount (1)
   
Debenture
Carrying
Value
 
Optional
Redemption
Date
 
Interim
Principal
Payments
 
Debentures
Maturity Date
 
Coupon Interest Rate
MMIC
  $ 30,000     $     $ 30,000  
May 5, 2014
   
May 5, 2034
 
9.5% to May 2014, then greater of 9.5% or 6.0% plus 10 year Treasury
MFH
    58,420       (3,247 )     55,173  
May 5, 2014
   
May 5, 2034
 
0.75% to January 2012, 9.5% to May 2014,  then greater of 9.5% or 6.0% plus 10 year Treasury
MFH
    61,000       (3,616 )     57,384  
March 30, 2010
 
$8,900 due June 2014
 
March 30, 2035
 
0.75% to May 2012, 8.05% to May 2015, then 3 month LIBOR plus 3.3%
MFH
    47,275       (3,215 )     44,060  
July 30, 2010
 
$6,500 due July 2014
 
July 30, 2035
 
 0.75% to May 2012, 7.62% to May 2015, then 3 month LIBOR plus 3.3%
    $ 196,695     $ (10,078 )   $ 186,617                

(1)
The discount represents additional principal owed for which no cash proceeds were received less the amount of cumulative discount that has been amortized through March 31, 2011.
 
Interest expense on the subordinated debentures totaled $3.9 million and $3.7 million for the three months ended March 31, 2011 and 2010, respectively.
 
If the Company is not able to negotiate other arrangements, the Company will not be able to pay the interest on the subordinated debentures when the rate increases beginning in the first quarter of 2012, or possibly sooner.  If these subordinated debentures were accelerated the Company would not be able to pay the debt.
 
Covenant Compliance and Debt Maturities
 
As a result of the Company restructuring its debt agreements or obtaining forbearance agreements, none of our obligations have been accelerated at present.  The Company had debt agreements totaling $54.6 million at March 31, 2011 that had payment defaults at maturity, but were subject to forbearance agreements that expire on June 30, 2011.  The Company is currently negotiating an extension of these forbearance agreements.
 
The following table summarizes the annual principal payment commitments at March 31, 2011:
 
(in thousands)
     
2011 (1)
  $ 68,850  
2012
    72,896  
2013
    47,039  
2014
    32,898  
2015
    39,745  
Thereafter
    948,627  
Total
  $ 1,210,055  
 
(1)
Of this amount, $54.6 million represents proceeds from the legal transfer of assets that failed to receive sale accounting and are therefore accounted for as a secured borrowing, all of which is subject to the above mentioned forbearance agreements.
 
Letters of Credit
 
The Company has letter of credit facilities with multiple financial institutions and institutional investors that are generally used as a means to pledge collateral to support Company obligations.  At March 31, 2011, the Company had $55.8 million in outstanding letters of credit posted as collateral, of which $10.0 million will mature in the second quarter of 2011; $25.1 million will mature in the third quarter of 2011; $14.2 million will mature in 2012 and the remaining $6.5 million will mature in 2017.  For those letters of credit that expire in the second and third quarters of 2011, we are in the process of either reducing them or having their maturity dates extended.  Although we currently expect that we will be able to reduce the amount outstanding on our expiring letters of credit or otherwise extend their maturities, if we are unable to do so our liquidity and financial condition may be adversely affected.
 
 
21

 
 
NOTE 9—FINANCIAL INSTRUMENTS
 
The following table provides information about financial assets and liabilities not carried at fair value in the consolidated balance sheets.  This table excludes non-financial assets and liabilities.
 
The fair value estimates are made at a discrete point in time based on relevant market information and information about the financial instruments.  A description of how the Company estimates fair values is provided below.  These estimates are subjective in nature, involve uncertainties and significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.
 
   
March 31, 2011
   
December 31, 2010
 
(in thousands)
 
Carrying
Amount
   
Estimated
Fair Value
   
Carrying
Amount
   
Estimated
Fair Value
 
Assets:
                       
Loans held for investment
  $ 21,458     $ 19,734     $ 53,933     $ 52,045  
Loans held for sale
    5,284       5,732       18,989       20,156  
Investment in preferred stock
    36,371       37,845       36,371       37,487  
                                 
Liabilities:
                               
Line of credit facilities
                4,190       4,190  
Senior interests and debt owed to securitization trusts
    729,910       730,449       748,100       748,665  
Notes payable and other debt
    165,122       118,299       207,885       162,024  
Subordinated debentures
    186,617       27,537       183,711       27,537  
Mandatorily redeemable preferred shares
    128,406       118,189       133,529       123,444  
Liabilities of consolidated funds and ventures:
                               
Notes payable
    3,677       3,677       3,709       3,709  
                                 
   
Notional
Amount
   
Estimated
Fair Value
   
Notional
Amount
   
Estimated
Fair Value
 
Off-Balance Sheet Financial Instruments:
                               
Lending Commitments
  $ 283     $ 283     $ 315     $ 315  

Loans held for investment and loans held for sale – For non-performing loans, given that the Company has the right to foreclose on the underlying real estate which is collateral for the loan, the Company estimates the fair value by using an estimate of sales price, if available, less estimated selling costs.  Estimates of sales prices are derived from a number of sources including current bids, appraisals and/or broker opinions of value.  If the sales price is not readily estimable from such sources, as well as for all performing loans, the Company estimates fair value by discounting the expected cash flows using current market yields for similar loans.
 
Investment in preferred stock –The fair value of the preferred stock was determined based on the terms and conditions of the preferred stock as compared to other, similar instruments in the market, as well as determining the fair value of the embedded loss sharing feature that is contained in the Series B and C preferred stock agreements.
 
Line of credit – The carrying value approximates fair value as these are collateralized variable interest rate loans with indexes and spreads that approximate market.
 
Senior interests and debt owed to securitization trusts – The carrying value approximates fair value for weekly reset variable rate senior certificates as these are variable interest rate securities with indexes and spreads that approximate market.  The fair value of senior interests in securitization trusts for fixed rate senior securities was estimated by discounting contractual cash flows using current market rates for comparable debt.
 
Notes payable and other debt – The fair value was estimated based on discounting contractual cash flows using a market rate of interest, taking into account credit risk and collateral values.
 
Subordinated debentures and mandatorily redeemable preferred shares – The fair value of the subordinated debentures and mandatorily redeemable preferred shares was estimated using current market prices for comparable instruments, taking into account credit risk.
 
 
22

 

Liabilities of consolidated funds and ventures:
Notes Payable – The fair value was estimated by discounting contractual cash flows incorporating market yields for comparable debt, taking into account credit risk and collateral values.
 
Off-Balance Sheet Financial Instruments:
Lending commitments – The fair value of lending commitments was estimated based on the fair value of the corresponding funded loans, taking into consideration the remaining commitment amount.
 
NOTE 10—FAIR VALUE MEASUREMENTS
 
As required by GAAP, assets and liabilities are classified into levels based on the lowest level of input that is significant to the fair value measurement.  The determination of which level an asset or liability gets classified into is based on the following fair value hierarchy:
 
·
Level 1:  Quoted prices in active markets for identical instruments.
 
·
Level 2:  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 in which significant inputs or significant value drivers are observable in active markets.
 
·
Level 3:  Valuations derived from valuation techniques in which significant inputs or significant value drivers are unobservable.
 
The following tables present assets and liabilities that are measured at fair value on a recurring basis at March 31, 2011 and December 31, 2010.
 
     
Fair Value Measurement Levels at March 31, 2011
 
(in thousands)
 
March 31,
2011
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                       
Bonds available-for-sale
  $ 1,199,912     $     $     $ 1,199,912  
Derivative assets
    6,088             6,088        
                                 
Liabilities:
                               
Derivative liabilities
  $ 18,059     $     $ 17,488     $ 571  

 
   
Fair Value Measurement Levels at December 31, 2010
 
(in thousands)
 
December 31,
2010
   
Level 1
   
Level 2
   
Level 3
 
Assets:
                       
Bonds available-for-sale
  $ 1,231,036     $     $     $ 1,231,036  
Derivative assets
    6,812             6,812        
                                 
Liabilities:
                               
Derivative liabilities
  $ 20,153     $     $ 19,603     $ 550  

The following table presents activity for assets and liabilities measured at fair value on a recurring basis using Level 3 inputs for the three months ended March 31, 2011:
 
(in thousands)
 
Bonds
Available-
for-Sale
   
Derivative
Liabilities
 
Balance, January 1, 2011
  $ 1,231,036     $ (550 )
Total losses included in earnings
    (4,260 )     (21 )
Total losses included in other comprehensive income
    (1,445 )      
Impact from sales
    (21,123 )      
Impact from settlements
    (4,296 )      
Balance, March 31, 2011
  $ 1,199,912     $ (571 )
 
 
23

 
 
The following table provides the amount included in earnings from continuing operations related to the activity presented in the table above, as well as additional realized gains (losses) recognized at settlement.
 
(in thousands)
 
Net losses on
bonds (1)
   
Equity in Losses
from Lower Tier
Property
Partnerships
   
Net gains
(losses) on
derivatives
 
                   
Change in realized gains related to assets and liabilities held at January 1, 2011, but settled during 2011
  $     $     $ 9  
Change in unrealized losses related to assets and liabilities still held at March 31, 2011
    (3,510 )     (750 )     (30 )
Additional realized losses recognized at settlement
    (321 )            
Total losses reported in earnings
  $ (3,831 )   $ (750 )   $ (21 )
 
 
(1)
Amounts are reflected through “Impairment on bonds” and “Net (losses) gains on sale of bonds” in the consolidated statements of operations.
 
The following table presents activity for assets and liabilities measured at fair value on a recurring basis using Level 3 inputs for the three months ended March 31, 2010:
(in thousands)
 
Bonds
Available-
for-Sale
   
Derivative
Liabilities
 
Balance, January 1, 2010
  $ 1,348,133     $ (919 )
Total (losses) gains included in earnings
    (6,988 )     447  
Total gains included in other comprehensive income
    3,602        
Impact from purchases
    635        
Impact from sales
    (14,793 )      
Impact from deconsolidation of GP Take Back partnership
    6,422        
Impact from settlements
    (19,393 )      
Balance, March 31, 2010
  $ 1,317,618     $ (472 )

The following table provides the amount included in earnings continuing operations related to the activity presented in the table above, as well as additional realized gains (losses) recognized at settlement.
 
(in thousands)
 
Net (losses) gains on
bonds (1)
   
Equity in Losses
from Lower Tier
Property
Partnerships
   
Net gains on
derivatives
 
                   
Change in realized gains related to assets and liabilities held at January 1, 2010, but settled during 2010
  $     $     $ 403  
Change in unrealized (losses) gains related to assets and liabilities still held at March 31, 2010
    (6,434 )     (554 )     44  
Additional realized gains recognized at settlement
    366              
Total (losses) gains reported in earnings
  $ (6,068 )   $ (554 )   $ 447  
 
 
(1)
Amounts are reflected through “Impairment on bonds” and “Net (losses) gains on sale of bonds” in the consolidated statements of operations.
 
The following methods or assumptions were used to estimate the fair value of these recurring financial and non-financial instruments:
 
Bonds Available-for-Sale The fair value is based on quoted prices, where available.  Otherwise, the fair value of performing bonds is based on discounted cash flows based on the expected bond payments, including certain prepayment assumptions that take into consideration lock-out and other prepayment penalties.  The discount rate takes into consideration current market yields for similar instruments, specific bond credit characteristics and other bond attributes, like the location of the property securing the bond and the bond size.  The weighted average discount rate for the performing bond portfolio was 7.03% and 7.13% at March 31, 2011 and December 31, 2010, respectively.  The fair value for the non-performing bond portfolio and collateral dependent bonds is based on an estimate of the collateral value, which is derived from a number of sources, including purchase and sale agreements, appraisals or broker opinions of value.  If the sale price is not readily estimable from such sources, the Company estimates fair value by discounting the property’s expected cash flows and residual proceeds using estimated market discount and capitalization rates, less estimated selling costs.  The discount rate averaged 9.7% and 10.0% at March 31, 2011 and December 31, 2010, respectively.  The capitalization rate averaged 8.5% and 8.7% at March 31, 2011 and December 31, 2010, respectively.
 
 
24

 
 
Derivative Financial Instruments – The fair value of derivatives was based on dealer quotes, where available, or estimated using valuation models incorporating current market assumptions.  The Company’s interest rate swap agreements have collateral posting requirements that are considered in determining the fair value of these instruments.
 
The following tables present assets that are measured at fair value on a non-recurring basis at March 31, 2011 and December 31, 2010.
 
 
   
Fair Value Measurement Levels at
 March 31, 2011
   
Total Losses Reported Through:
 
(in thousands)
 
March 31,
2011
   
Level 1
   
Level 2
   
Level 3
   
Continuing
Operations
   
Discontinued
Operations
 
Assets:
                                   
Loans held for sale
  $ 1,591     $     $     $ 1,591     $ (195 )   $  

 
   
Fair Value Measurement Levels at
 December 31, 2010
   
Total Gains (Losses) Reported
Through:
 
 
(in thousands)
 
December 31,
2010
   
Level 1
   
Level 2
   
Level 3
   
Continuing
Operations
   
Discontinued
Operations
 
Assets:
                                   
Loans held for sale
  $ 7,352     $     $     $ 7,352     $ 19     $  
Investments in unconsolidated ventures
    6,779                   6,779       (2,652 )      
 
The following methods or assumptions were used to estimate the fair value of these nonrecurring financial and non-financial instruments:
 
Loans Held for Sale – The fair value of loans held for sale was estimated by discounting the expected cash flows using current market yields for similar loans.
 
NOTE 11—GUARANTEES AND COLLATERAL
 
Guarantees
 
The following table summarizes guarantees, by type, at March 31, 2011 and December 31, 2010:
 
   
March 31, 2011
   
December 31, 2010
 
(in thousands)
 
Maximum
Exposure
   
Carrying
Amount
   
Maximum
Exposure
   
Carrying
Amount
 
Mortgage banking loss-sharing agreements
  $ 806     $ 463     $ 430     $ 379  
Indemnification contracts
    112,404       2,116       112,404       2,198  
Other financial/payment guarantees