J.G. Wentworth Co - FORM 10-Q - November 14, 2017

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EX-32.2 - EXHIBIT 32.2 - J.G. Wentworth Cojgwe9301710-qexhibit322.htm
EX-32.1 - EXHIBIT 32.1 - J.G. Wentworth Cojgwe9301710-qexhibit321.htm
EX-31.2 - EXHIBIT 31.2 - J.G. Wentworth Cojgwe9301710-qexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - J.G. Wentworth Cojgwe9301710-qexhibit311.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 (Mark One)
 ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
Or
o         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: 001-36170
THE J.G. WENTWORTH COMPANY
(Exact name of registrant as specified in its charter)
Delaware
 
46-3037859
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1200 Morris Drive
Suite 300
Chesterbrook, Pennsylvania
 
19087
(Address of principal executive offices)
 
(Zip Code)
(484) 434-2300
(Registrant's telephone number, including area 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 and 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.  ý  Yes  o  No
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).  ý  Yes  o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer   o
Accelerated filer    o
Non-accelerated filer  o (Do not check if smaller reporting company)
Smaller reporting company   x
Emerging growth company   x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). o  Yes  ý  No 
The number of shares of the registrant's Class A common stock, par value $0.00001 per share, outstanding was 15,810,703 as of October 31, 2017. The number of shares of the registrant's Class B common stock, par value $0.00001 per share, outstanding was 8,629,738 as of October 31, 2017.
 


TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements which reflect management's expectations regarding our future growth, results of operations, operational and financial performance and business prospects and opportunities. These forward-looking statements are within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, are forward-looking statements. You can identify such statements because they contain words such as "plans," "expects" or "does not expect," "budget," "forecasts," "anticipates" or "does not anticipate," "believes," "intends," and similar expressions or statements that certain actions, events or results "may," "could," "would," "might," or "will" be taken, occur or be achieved. Although the forward-looking statements contained in this Quarterly Report on Form 10-Q reflect management's current beliefs based upon information currently available to management and upon assumptions which management believes to be reasonable, actual results may differ materially from those stated in or implied by these forward-looking statements.
Forward-looking statements necessarily involve significant known and unknown risks, assumptions and uncertainties that may cause our actual results, performance and achievements in future periods to differ materially from those expressed or implied by such forward-looking statements. Although we have attempted to identify important risk factors that could cause actual actions, events or results to differ materially from those described in or implied by our forward-looking statements, several factors could cause actual results, performance or achievements to differ materially from the results expressed or implied in the forward-looking statements and impact us as a going concern. We cannot assure you that forward-looking statements will prove to be accurate, as actual actions, results and future events could differ materially from those anticipated or implied by such statements.
These forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q, and, except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to publicly revise any forward-looking statements to reflect circumstances or events after the date of this Quarterly Report on Form 10-Q, or to reflect the occurrence of unanticipated events. These factors should be considered carefully and readers should not place undue reliance on forward-looking statements. You should, however, review the factors and risks we describe in the reports we file from time to time with the Securities and Exchange Commission after the date of this Quarterly Report on Form 10-Q. In addition to those set forth under "Part II, Item 1A. 'Risk Factors'" in this Quarterly Report on Form 10-Q, these risks and uncertainties include, among other things:
•
our entry into a restructuring support agreement (the “Restructuring Support Agreement”) to restructure our long-term debt and equity under chapter 11 of the United States Bankruptcy Code;
•
the risks and uncertainties associated with the bankruptcy process;
•
the plan of reorganization contemplated by the Restructuring Support Agreement (the “Plan”) provides for all existing equity interests of our common stockholders to be canceled and for our common stockholders to lose the full amount of their investment;
•
our ability to satisfy the conditions and milestones contained in the Restructuring Support Agreement;
•
our ability to obtain confirmation of the Plan;
•
the ability of our management to focus on the operation of our business during the pendency of the bankruptcy;
•
our ability to execute on our business strategy;
•
our ability to successfully compete in the industries in which we operate;
•
our dependence on the effectiveness of direct response marketing;
•
our ability to retain and attract qualified senior management;
•
any improper use of or failure to protect the personally identifiable information of past, current and prospective customers to which we have access;
•
our ability to upgrade and integrate our operational and financial information systems, maintain uninterrupted access to such systems and adapt to technological changes in the industries in which we operate;
•
our dependence on third parties, including our ability to maintain relationships with such third parties and our potential exposure to liability for the actions of such third parties;
•
damage to our reputation and increased regulation of our industries which could result from unfavorable press reports about our business model;
•
infringement of our trademarks or service marks;
•
changes in, and our ability to comply with, any applicable federal, state and local laws and regulations governing us, including any applicable federal consumer financial laws enforced by the Consumer Financial Protection Bureau;
•
our ability to maintain our state licenses or obtain new licenses in new markets;
•
our ability to continue to purchase structured settlement payments and other financial assets;
•
our business model being susceptible to litigation;


•
our ability to remain in compliance with the terms of our substantial indebtedness and to refinance our term debt;
•
our ability to obtain sufficient working capital at attractive rates or obtain sufficient capital to meet the financing requirements of our business;
•
our ability to renew or modify our warehouse lines of credit;
•
the accuracy of the estimates and assumptions of our financial models;
•
changes in prevailing interest rates and our ability to mitigate interest rate risk through hedging strategies;
•
the public disclosure of the identities and information of structured settlement holders maintained in our proprietary database;
•
our dependence on the opinions of certain credit rating agencies of the credit quality of our securitizations;
•
our ability to complete future securitizations, other financings or sales on favorable terms;
•
the insolvency of a material number of structured settlement issuers;
•
adverse changes in the residential mortgage lending and real estate markets, including any increases in defaults or delinquencies, especially in geographic areas where our loans are concentrated;
•
our ability to grow our loan origination volume, retain mortgage servicing rights ("MSRs") and recapture loans that are refinanced;
•
changes in the guidelines of government sponsored enterprises ("GSEs"), or any discontinuation of, or significant reduction in, the operation of GSEs;
•
potential misrepresentations by borrowers, counterparties and other third parties;
•
our ability to raise additional capital as a result of our Class A common stock now being traded on the OTCQX® Market; and
•
our ability to meet the ongoing eligibility standards of the OTCQX® Market.

The J.G. Wentworth Company
Condensed Consolidated Balance Sheets

PART I. FINANCIAL INFORMATION 
Item 1. Financial Statements
 
September 30, 2017
 
December 31, 2016
 
(Unaudited)
 
 
 
(Dollars in thousands, except share and per share data)
ASSETS
 

 
 

Cash and cash equivalents
$
54,892

 
$
80,166

Restricted cash and investments
139,979

 
195,588

VIE finance receivables, at fair value (1)
4,330,264

 
4,143,903

Other finance receivables, at fair value
20,879

 
13,134

VIE finance receivables, net of allowances for losses of $8,611 and $9,023, respectively (1)
77,640

 
85,325

Other finance receivables, net of allowances for losses of $2,010 and $2,061, respectively
7,966

 
8,619

Other receivables, net of allowances for losses of $268 and $280, respectively
19,687

 
17,771

Mortgage loans held for sale, at fair value (2)
239,477

 
232,770

Mortgage servicing rights, at fair value (2)
50,018

 
41,697

Premises and equipment, net of accumulated depreciation of $12,597 and $10,697, respectively
3,504

 
4,005

Intangible assets, net of accumulated amortization of $24,082 and $22,778, respectively
21,564

 
22,868

Goodwill
—

 
8,369

Marketable securities, at fair value
82,119

 
76,687

Deferred tax assets, net
—

 
405

Other assets
61,613

 
61,600

Total Assets
$
5,109,602

 
$
4,992,907

 
 
 
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
 

 
 

Accrued expenses and accounts payable
$
33,697

 
$
28,929

Accrued interest
32,714

 
28,123

Term loan payable
438,148

 
431,872

VIE derivative liabilities, at fair value
43,494

 
50,432

VIE borrowings under revolving credit facilities and other similar borrowings
1,735

 
56,432

Other borrowings under revolving credit facilities and other similar borrowings
231,002

 
229,588

VIE long-term debt
59,586

 
62,939

VIE long-term debt issued by securitization and permanent financing trusts, at fair value
4,200,824

 
4,014,450

Other liabilities
51,434

 
52,448

Deferred tax liabilities, net
2,963

 
1,415

Installment obligations payable
82,119

 
76,687

Total Liabilities
$
5,177,716

 
$
5,033,315

 
 
 
 
Commitments and contingencies (Note 18)


 


 
 
 
 
Class A common stock, par value $0.00001 per share; 500,000,000 shares authorized, 16,352,775 issued and 15,810,703 outstanding as of September 30, 2017, 16,272,545 issued and 15,730,473 outstanding as of December 31, 2016
$
—

 
$
—

Class B common stock, par value $0.00001 per share; 500,000,000 shares authorized, 8,629,738 issued and outstanding as of September 30, 2017, 8,710,158 issued and outstanding as of December 31, 2016
—

 
—

Class C common stock, par value $0.00001 per share; 500,000,000 shares authorized, 0 issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
—

 
—

Additional paid-in-capital
106,060

 
105,823

Accumulated deficit
(134,148
)
 
(117,622
)
 
(28,088
)
 
(11,799
)
Less: treasury stock at cost, 542,072 shares as of September 30, 2017 and December 31, 2016, respectively
(2,138
)
 
(2,138
)
Total stockholders' deficit, The J.G. Wentworth Company
(30,226
)
 
(13,937
)
Non-controlling interests
(37,888
)
 
(26,471
)
Total Stockholders' Deficit
(68,114
)
 
(40,408
)
Total Liabilities and Stockholders' Deficit
$
5,109,602

 
$
4,992,907

(1) Refer to Note 5 "VIE and Other Finance Receivables, at Fair Value" and Note 6 "VIE and Other Finance Receivables, net of Allowance for Losses" for further details on assets pledged as collateral.
(2) Pledged as collateral to Other borrowings under revolving credit facilities and other similar borrowings. Refer to Note 7 "Mortgage Loans Held for Sale, at Fair Value" and Note 8 "Mortgage Servicing Rights, at Fair Value."
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1
The J.G. Wentworth Company
Condensed Consolidated Statements of Operations (Unaudited)


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands, except share and per share data)
REVENUES
 
 
 
 
 

 
 

Interest income
$
47,380

 
$
43,991

 
$
144,737

 
$
145,211

Realized and unrealized gains (losses) on VIE and other finance receivables, long-term debt and derivatives
36,472

 
(9,104
)
 
89,303

 
(12,339
)
Realized and unrealized gains on sale of mortgage loans held for sale, net of direct costs
22,024

 
24,495

 
54,060

 
61,781

Changes in mortgage servicing rights, net
3,240

 
1,480

 
8,321

 
3,320

Servicing, broker, and other fees
4,489

 
3,023

 
14,429

 
9,758

Loan origination fees
2,867

 
2,536

 
7,329

 
6,445

Realized and unrealized gains on marketable securities, net
2,228

 
2,376

 
6,629

 
3,921

Total revenues
$
118,700

 
$
68,797

 
$
324,808

 
$
218,097

 
 
 
 
 
 
 
 
EXPENSES
 

 
 

 
 

 
 

Advertising
$
17,582

 
$
13,894

 
$
49,205

 
$
42,191

Interest expense
57,969

 
54,561

 
174,241

 
167,861

Compensation and benefits
22,131

 
20,792

 
57,664

 
59,835

General and administrative
6,840

 
7,732

 
20,432

 
21,822

Professional and consulting
5,691

 
3,977

 
15,525

 
12,386

Debt issuance
2,252

 
2,584

 
4,672

 
3,132

Securitization debt maintenance
1,326

 
1,380

 
4,004

 
4,226

Provision for losses
1,267

 
2,075

 
2,919

 
4,647

Direct subservicing costs
957

 
493

 
2,766

 
1,742

Depreciation and amortization
937

 
1,182

 
3,204

 
3,646

Installment obligations expense, net
2,598

 
2,817

 
7,942

 
5,279

Impairment charges
8,369

 
—

 
8,369

 
5,483

Total expenses
$
127,919

 
$
111,487

 
$
350,943

 
$
332,250

Loss before income taxes
(9,219
)
 
(42,690
)
 
(26,135
)
 
(114,153
)
(Benefit) provision for income taxes
(2,705
)
 
(3,883
)
 
2,148

 
(16,787
)
Net loss
$
(6,514
)
 
$
(38,807
)
 
$
(28,283
)
 
$
(97,366
)
Less: net loss attributable to non-controlling interests
(4,200
)
 
(20,094
)
 
(11,757
)
 
(51,773
)
Net loss attributable to The J.G. Wentworth Company
$
(2,314
)
 
$
(18,713
)
 
$
(16,526
)
 
$
(45,593
)
 
 
 
 
 
 
 
 
Weighted average shares of Class A common stock outstanding:
 

 
 

 
 

 
 

Basic
15,810,703

 
15,663,475

 
15,772,732

 
15,633,696

Diluted
15,810,703

 
15,663,475

 
15,772,732

 
15,633,696

Net loss per share attributable to stockholders of Class A common stock of The J.G. Wentworth Company
 

 
 

 
 

 
 

Basic
$
(0.15
)
 
$
(1.19
)
 
$
(1.05
)
 
$
(2.92
)
Diluted
$
(0.15
)
 
$
(1.19
)
 
$
(1.05
)
 
$
(2.92
)

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

2

The J.G. Wentworth Company
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Net loss
$
(6,514
)
 
$
(38,807
)
 
$
(28,283
)
 
$
(97,366
)
Total comprehensive loss
(6,514
)
 
(38,807
)
 
(28,283
)
 
(97,366
)
Less: comprehensive loss allocated to non-controlling interests
(4,200
)
 
(20,094
)
 
(11,757
)
 
(51,773
)
Comprehensive loss attributable to The J.G. Wentworth Company
$
(2,314
)
 
$
(18,713
)
 
$
(16,526
)
 
$
(45,593
)
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


3
The J.G. Wentworth Company
Condensed Consolidated Statement of Changes in Stockholders’ Deficit (Unaudited)


(Dollars in thousands, except share data)
 
 
 
Accumulated
Other
Comprehensive Income 
 
Non- controlling Interest
 
Accumulated Deficit
 
Additional Paid-In-
Capital
 
Treasury Stock
 
Common Stock - Class A
 
Common Stock - Class B
 
Total Stockholders' Deficit
 
 
 
 
 
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Balance as of December 31, 2016
 
$
—

 
$
(26,471
)
 
$
(117,622
)
 
$
105,823

 
542,072

 
$
(2,138
)
 
15,730,473

 
$
—

 
8,710,158

 
$
—

 
$
(40,408
)
Net loss
 
—

 
(11,757
)
 
(16,526
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(28,283
)
Share-based compensation
 
—

 
342

 
—

 
413

 
—

 
—

 
—

 
—

 
(9,871
)
 
—

 
755

Capital distributions
 
—

 
(178
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(178
)
Issuance of Class A common stock for vested equity awards
 
—

 
—

 
—

 
—

 
—

 
—

 
9,681

 
—

 
—

 
—

 
—

Exchange of JGW LLC common interests into Class A common stock
 
—

 
176

 
—

 
(176
)
 
—

 
—

 
70,549

 
—

 
(70,549
)
 
—

 
—

Balance as of September 30, 2017
 
$
—

 
$
(37,888
)
 
$
(134,148
)
 
$
106,060

 
542,072

 
$
(2,138
)
 
15,810,703

 
$
—

 
8,629,738

 
$
—

 
$
(68,114
)
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


4
The J.G. Wentworth Company
Condensed Consolidated Statements of Cash Flows (Unaudited)


 
 
Nine Months Ended September 30,
 
2017
 
2016
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net loss
$
(28,283
)
 
$
(97,366
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Provision for losses
2,919

 
4,647

Depreciation
1,900

 
2,052

Impairment charges
8,369

 
5,483

Changes in mortgage servicing rights, net
(8,321
)
 
(3,320
)
Amortization of finance receivables acquisition costs
12

 
51

Amortization of intangibles
1,304

 
1,594

Amortization of debt issuance costs
5,774

 
11,063

Proceeds from sale of and principal payments on mortgage loans held for sale
2,619,812

 
2,343,415

Originations and purchases of mortgage loans held for sale
(2,591,803
)
 
(2,462,754
)
Change in unrealized gains/losses on finance receivables
(241,310
)
 
(92,880
)
Change in unrealized gains/losses on long-term debt
161,447

 
167,243

Change in unrealized gains/losses on derivatives
(7,078
)
 
3,034

Net proceeds from sale of finance receivables
15,053

 
271,331

Realized and unrealized gains on sale of mortgage loans held for sale, net of direct costs
(54,060
)
 
(61,781
)
Purchases of finance receivables
(215,504
)
 
(204,775
)
Collections on finance receivables
395,362

 
404,520

Gain on sale of finance receivables
(2,180
)
 
(69,597
)
Recoveries of finance receivables
13

 
137

Accretion of interest income
(140,388
)
 
(141,885
)
Accretion of interest expense
(3,375
)
 
(23,611
)
Share-based compensation expense
755

 
997

Change in marketable securities
(6,629
)
 
(3,921
)
Installment obligations expense, net
7,942

 
5,279

Deferred income taxes, net
1,952

 
(16,787
)
Decrease (increase) in operating assets:
 
 
 
Restricted cash and investments
55,609

 
(7,809
)
Other assets
15,539

 
8,236

Other receivables
(1,907
)
 
(1,547
)
Increase in operating liabilities:
 
 
 
Accrued expenses and accounts payable
4,768

 
8,464

Accrued interest
4,591

 
3,934

Other liabilities
1,499

 
7

Net cash provided by operating activities
$
3,782

 
$
53,454

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

 



5
The J.G. Wentworth Company
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)


 
Nine Months Ended September 30,
 
2017
 
2016
 
(In thousands)
Cash flows from investing activities:
 
 
 
Final payment on purchase of Home Lending
$
—

 
$
(7,630
)
Purchases of premises and equipment, net of sales proceeds
(1,399
)
 
(754
)
Net cash used in investing activities
$
(1,399
)
 
$
(8,384
)
Cash flows from financing activities:
 
 
 
Capital distributions
$
(178
)
 
$
—

Issuance of VIE long-term debt
279,835

 
216,806

Payments for debt issuance costs
(1,351
)
 
(1,133
)
Payments on capital lease obligations
(40
)
 
(37
)
Repayments of long-term debt and derivatives
(251,281
)
 
(390,980
)
Gross proceeds from revolving credit facilities
2,756,910

 
2,583,134

Repayments of revolving credit facilities
(2,811,552
)
 
(2,423,504
)
Issuance of installment obligations payable
9,994

 
3,472

Purchase of marketable securities
(9,994
)
 
(3,472
)
Repayments of installment obligations payable
(12,504
)
 
(13,966
)
Proceeds from sale of marketable securities
12,504

 
13,966

Net cash used in financing activities
$
(27,657
)
 
$
(15,714
)
Net (decrease) increase in cash and cash equivalents
(25,274
)
 
29,356

Cash and cash equivalents at beginning of year
80,166

 
57,322

Cash and cash equivalents at end of period
$
54,892

 
$
86,678

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
166,960

 
$
176,633

Cash paid for income taxes
$
208

 
$
101

Supplemental disclosure of noncash items:
 
 
 
Retained mortgage servicing rights in connection with sale of mortgage loans
$
14,732

 
$
11,404

Mortgage loans subject to repurchase rights from Ginnie Mae
$
(1,691
)
 
$
(5,798
)
Exchange of LLC Common Interests for shares of Class A common stock
$
(176
)
 
$
321

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


6
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)



1. Background, Basis of Presentation and Significant Accounting Policies
Organization and Description of Business Activities
The J.G. Wentworth Company (the "Corporation") is a Delaware holding company that was incorporated on June 21, 2013. The Corporation operates through its managing membership in The J.G. Wentworth Company, LLC ("JGW LLC"), the Corporation's sole operating asset. JGW LLC is a controlled and consolidated subsidiary of the Corporation whose sole asset is its membership interest in J.G. Wentworth, LLC. The "Company" refers collectively to the Corporation and, unless otherwise stated, all of its subsidiaries. The Company, operating through its subsidiaries and affiliates, has its principal offices in Chesterbrook, Pennsylvania and Woodbridge, Virginia.
The Company is focused on providing direct-to-consumer access to financing solutions through a variety of avenues, including: mortgage lending, structured settlement, annuity and lottery payment purchasing, prepaid cards, and access to providers of personal loans. The Company's direct-to-consumer businesses use digital channels, television, direct mail, and other channels to offer access to financing solutions. The Company warehouses, securitizes, sells or otherwise finances the financial assets that it purchases in transactions that are structured to ultimately generate cash proceeds to the Company that exceed the purchase price paid for those assets.
The Company identified the following two reportable segments in accordance with Accounting Standards Codification ("ASC") 280, Segment Reporting:
(i) Structured Settlement Payments ("Structured Settlements") - Structured Settlements provides liquidity to individuals with financial assets such as structured settlements, annuities, and lottery winnings by either purchasing these financial assets for a lump-sum payment, issuing installment obligations payable over time, or serving as a broker to other purchasers of those financial assets. The Company engages in warehousing and subsequent resale or securitization of these various financial assets. Structured Settlements also includes corporate activities, payment solutions, pre-settlements and providing (i) access to providers of personal lending and (ii) access to providers of funding for pre-settled legal claims.
(ii) Home Lending - Home Lending is primarily engaged in retail mortgage lending, originating primarily Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA) and conventional mortgage loans, and is approved as a Title II, non-supervised direct endorsement mortgagee with the U.S. Department of Housing and Urban Development (HUD). In addition, Home Lending is an approved issuer with the Government National Mortgage Association ("Ginnie Mae"), Federal Home Loan Mortgage Corporation ("Freddie Mac"), and U.S. Department of Agriculture (USDA), as well as an approved seller and servicer with the Federal National Mortgage Association ("Fannie Mae").
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information and Article 10 of Regulation S-X and do not include all of the information required by U.S. GAAP for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments which are necessary for a fair presentation of financial position, results of operations, and cash flows for the interim periods presented. All such adjustments are of a normal and recurring nature. The results of operations for interim periods are not necessarily indicative of the results for the entire year.
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the amounts of revenues and expenses during the reporting periods. The most significant balance sheet accounts that could be affected by such estimates are variable interest entity ("VIE") finance receivables, at fair value; other finance receivables, at fair value; mortgage loans held for sale, at fair value; mortgage servicing rights, at fair value; intangible assets, net of accumulated amortization; goodwill; VIE derivative liabilities, at fair value; and VIE long-term debt issued by securitization and permanent financing trusts, at fair value. Actual results could differ from those estimates and such differences could be material. These condensed consolidated financial statements should be read in conjunction with the Company's 2016 audited consolidated financial statements that are included in its Annual Report on Form 10-K.
The accompanying condensed consolidated financial statements include the accounts of the Corporation, its wholly-owned subsidiaries, other entities in which the Company has a controlling financial interest and those entities that are considered VIEs where the Company has been determined to be the primary beneficiary in accordance with Accounting Standards Codification 810, Consolidation ("ASC 810").

7
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


JGW LLC meets the definition of a VIE under ASC 810. Further, the Corporation is the primary beneficiary of JGW LLC as a result of its control over JGW LLC. As the primary beneficiary of JGW LLC, the Corporation consolidates the financial results of JGW LLC and records a non-controlling interest for the economic interest in JGW LLC not owned by the Corporation. The Corporation's and the non-controlling interests' economic interest in JGW LLC was 54.9% and 45.1%, respectively, as of September 30, 2017. The Corporation's and the non-controlling interests' economic interest in JGW LLC was 54.6% and 45.4%, respectively, as of December 31, 2016.
Net loss attributable to the non-controlling interests in the Company's condensed consolidated statements of operations represents the portion of loss attributable to the economic interest in JGW LLC held by entities and individuals other than the Corporation. The allocation of net loss attributable to the non-controlling interests is based on the weighted average percentage of JGW LLC owned by the non-controlling interests during the reporting period. The non-controlling interests' weighted average economic interests in JGW LLC for the three months ended September 30, 2017 and 2016 were 45.1% and 45.4%, respectively. The non-controlling interests' weighted average economic interests in JGW LLC for the nine months ended September 30, 2017 and 2016 were 45.2% and 45.5%, respectively.
The net loss attributable to The J.G. Wentworth Company in the condensed consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016 does not necessarily reflect the Corporation's weighted average economic interests in JGW LLC for the respective periods because the majority of the benefit for income taxes was specifically attributable to the legal entity The J.G. Wentworth Company, and thus was not allocated to the non-controlling interests. For the three months ended September 30, 2017, $2.8 million of the $2.7 million total tax benefit was specifically attributable to The J.G. Wentworth Company. The remaining $0.1 million tax provision relates to the Company’s subsidiaries. For the three months ended September 30, 2016, $5.5 million of the $3.9 million total tax benefit was specifically attributable to The J.G. Wentworth Company. The remaining $1.6 million tax provision relates to the Company’s subsidiaries. For the nine months ended September 30, 2017, $2.1 million of the $2.1 million total tax provision was specifically attributable to The J.G. Wentworth Company. The remaining tax provision of less than $0.1 million relates to the Company’s subsidiaries. For the nine months ended September 30, 2016, $16.5 million of the $16.8 million total tax benefit was specifically attributable to The J.G. Wentworth Company. The remaining $0.3 million tax benefit relates to the Company’s subsidiaries. Refer to Note 15 for a description of the Company's income taxes.
Non-controlling interests on the Company's condensed consolidated balance sheets represent the portion of (deficit) equity attributable to the non-controlling interests of JGW LLC. The allocation of (deficit) equity to the non-controlling interests in JGW LLC is based on the weighted average percentage owned by the non-controlling interests in the entity.
All material inter-company balances and transactions are eliminated in consolidation. Certain prior-period amounts have been reclassified to conform to current-period presentation.
Going Concern
In accordance with the Financial Accounting Standards Board, (“FASB”) Accounting Standards Codification ("ASC") Subtopic 205-40 Going Concern ("ASC 205-40"), management must evaluate whether there are conditions or events, considered in the aggregate, that could raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. In making its evaluation, management is not able to take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the financial statements are issued. However, when the relevant conditions or events, considered in the aggregate, initially indicate that substantial doubt may exist, management may consider in its evaluation whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.
As we disclosed in the Current Report on Form 8-K which we filed with the U.S. Securities and Exchange Commission ("SEC") on November 9, 2017 (the “Form 8-K”) the Corporation along with four of its direct and indirect subsidiaries, JGW LLC, J.G. Wentworth, LLC, JGW Holdings, Inc., and Orchard Acquisition Company, LLC (collectively, the “Company Parties”) entered into a restructuring support agreement (“Restructuring Support Agreement “) with certain lenders and certain members of JGW LLC to support a comprehensive restructuring of the Company’s long-term debt and existing equity (the “Restructuring”). The Restructuring is expected to be implemented through a pre-packaged Chapter 11 plan of reorganization (the “Plan”) pursuant to cases (the “Chapter 11 Cases”) commenced under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Company expects ordinary-course operations to continue substantially uninterrupted during and after the Chapter 11 Cases. The Restructuring Support Agreement may be terminated upon the occurrence of certain events, including, amongst others, the failure to meet specified milestones relating to

8
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


filing of the Chapter 11 Cases and confirmation and consummation of the Plan, as well as in the event of certain breaches by the parties under the Restructuring Support Agreement. The Restructuring Support Agreement is subject to termination if the effective date of the Plan has not occurred within 21 days after entry by the Bankruptcy Court of an order confirming the Plan. The Plan is expected to be subject to certain conditions, including the obtaining of certain regulatory and third party approvals.
In evaluating the Company's ability to continue as a going concern, management considered the conditions and events, including the above factors, that could raise substantial doubt about our ability to continue as a going concern within one year after the date that our condensed consolidated financial statements are issued, November 14, 2017. There are certain material conditions we must satisfy under the Restructuring Support Agreement, including timely meeting specified milestones related to the solicitation of votes to approve the Plan, commencement of the Chapter 11 Cases, confirmation of the Plan, and consummation of the Plan. The Company's ability to timely complete such milestones is subject to risks and uncertainties, many of which are beyond the Company's control. Based on this assessment, management has concluded that the Company’s entry into the Restructuring Support Agreement, which is expected to be effectuated through a pre-packaged Chapter 11 plan of reorganization, raises substantial doubt about the Company’s ability to continue as a going concern, which will not be alleviated before the Company emerges from the Chapter 11 Cases.
Notwithstanding the substantial doubt regarding the Company’s ability to continue as a going concern, the accompanying condensed consolidated financial statements included in this Form 10-Q have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying condensed consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
Significant Accounting Policies
There have been no significant changes to the Company's accounting policies as previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2016.

9
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


2. Recently Adopted Accounting Pronouncements
The Company qualifies as an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012 ("JOBS Act"). As a result, the Company is permitted to, and has opted to, rely on exemptions from certain disclosure requirements that are applicable to other companies that are not emerging growth companies. In particular, the Company can take advantage of an extended transition period for complying with new or revised accounting standards which allows the Company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company took advantage of the extended transition period as permitted under the JOBS Act.
We will remain an emerging growth company until the earliest to occur of the following:
•
our reporting of $1.07 billion or more in annual gross revenues;
•
our issuance, in a three-year period, of more than $1 billion in non-convertible debt;
•
the end of the fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million on the last business day of our second fiscal quarter; or
•
the end of fiscal 2018.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), which is effective for public business entities for interim and annual periods beginning after December 15, 2020 and for all other entities for periods beginning after December 15, 2021. Under ASU 2017-04, Step 2 of the goodwill impairment test has been eliminated. Step 2 of the goodwill impairment test required companies to determine the implied fair value of the reporting unit’s goodwill. Under the new guidance, companies will perform their annual, or interim, goodwill impairment test by comparing the reporting unit’s carrying value, including goodwill, to the fair value. ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Early adoption of ASU 2017-04 is permitted for all entities for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted ASU 2017-04 for its interim goodwill impairment test performed as of September 30, 2017 (see Note 3) as the interim evaluation during the three months ended September 30, 2017 identified events and circumstances that indicated it was more likely than not that the fair value of the reporting unit was less than its carrying value. The adoption of ASU 2017-04 does not impact the Company’s eligibility to continue to take advantage of the extended transition periods afforded to emerging growth companies under the JOBS Act.
There were no other accounting pronouncements adopted during the three months ended September 30, 2017.

10
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


3. Goodwill and Intangible Assets
The goodwill of the Company consists of $0.0 million and $8.4 million related to the Home Lending segment as of September 30, 2017 and December 31, 2016, respectively. There is no goodwill related to the Structured Settlements segment as of September 30, 2017 and December 31, 2016.
Intangible assets subject to amortization include the following as of:
 
 
Structured Settlements
 
Home Lending
 
 
Cost
 
Accumulated Amortization
 
Cost
 
Accumulated Amortization
 
 
(In thousands)
September 30, 2017
 
 
 
 
 
 
 
 
Database
 
$
4,609

 
$
(4,443
)
 
$
—

 
$
—

Customer relationships
 
16,096

 
(15,869
)
 
—

 
—

Domain names
 
486

 
(470
)
 
—

 
—

Trade name
 
613

 
(315
)
 
1,095

 
(917
)
Affinity relationships
 
—

 
—

 
9,547

 
(2,068
)
Intangible assets subject to amortization
 
$
21,804

 
$
(21,097
)
 
$
10,642

 
$
(2,985
)
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
Database
 
$
4,609

 
$
(4,356
)
 
$
—

 
$
—

Customer relationships
 
16,096

 
(15,750
)
 
—

 
—

Domain names
 
486

 
(461
)
 
—

 
—

Trade name
 
613

 
(157
)
 
1,095

 
(700
)
Affinity relationships
 
—

 
—

 
9,547

 
(1,354
)
Intangible assets subject to amortization
 
$
21,804

 
$
(20,724
)
 
$
10,642

 
$
(2,054
)
As of September 30, 2017 and December 31, 2016, the carrying value of Home Lending's indefinite-lived licenses and approvals intangible asset was $13.2 million.
Amortization of intangible assets is included in depreciation and amortization in the Company's condensed consolidated statements of operations. Amortization expense for the three months ended September 30, 2017 and 2016 was $0.4 million and $0.5 million, respectively. Amortization expense for the nine months ended September 30, 2017 and 2016 was $1.3 million and $1.6 million, respectively.
Estimated future amortization expense for amortizable intangible assets for the three months ending December 31, 2017 and for each of the succeeding five calendar years and thereafter is as follows:
 
 
Estimated Future Amortization Expense
 
 
(In thousands)
Remainder of 2017
 
$
439

2018
 
1,560

2019
 
1,035

2020
 
957

2021
 
954

2022
 
954

Thereafter
 
2,465

Total future amortization expense
 
$
8,364

As discussed in Note 2, the Company early adopted ASU 2017-04 for its interim goodwill impairment test performed as

11
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


of September 30, 2017. During the three months ended September 30, 2017, the Company re-evaluated its internal projections for its Home Lending reporting unit based on continued lower than anticipated profitability results, a reduction of its warehouse facilities and contemplation by the Company Parties of entering into the Restructuring Support Agreement and the related Restructuring which is expected to be effectuated through a pre-packaged Chapter 11 plan of reorganization. Accordingly, the Company determined these events constituted a triggering event requiring the Company to: (i) test the related indefinite-lived licenses and approvals intangible asset for impairment under ASC 350-30, (ii) test the related asset groups including the finite-lived intangible assets, which include the trade name and the affinity relationships, for impairment under ASC 360-10 and (iii) perform a goodwill impairment analysis.
The fair value of the indefinite-lived licenses and approvals intangible asset was determined by utilizing the with and without valuation methodology, and is considered a Level 3 (unobservable) fair value determination in the fair value hierarchy. Specifically, the with and without valuation methodology incorporated multi-year revenue projections, out of pocket costs and lag time to obtain licenses and approvals to originate loans. Key assumptions utilized in the fair value analysis included the following: (i) projected long-term growth rates in revenues, (ii) a discount rate, developed using a cost of equity analysis and (iii) an adjustment to reflect the tax amortization benefits under Section 197 of the Internal Revenue Code. As a result of this analysis, the fair value of the indefinite-lived licenses and approvals intangible asset exceeded their carrying value.
To test the related asset groups, which include the trade name and affinity relationships finite-lived intangible assets, the Company compared the undiscounted cash flows associated with the Home Lending reporting unit to the its carrying value as permitted under ASC 360-10. Key assumptions utilized in the recoverability test included the following: (i) projected long-term growth rates in revenue and (ii) terminal year cash flows capitalized using the cost of equity analysis less terminal growth rate. The results of the recoverability test indicated the estimated undiscounted cash flows of the Home Lending reporting unit exceeded its carrying value and, therefore, an impairment of the asset groups was not recorded as of September 30, 2017.
To estimate the fair value of Home Lending reporting unit, we used a combination of the income (i.e. discounted cash flow) and market approaches. The income approach utilized multi-year cash flow projections, which required considerable management judgment and estimates, that incorporated (i) projected long-term growth rates and (ii) a discount rate based on a cost of equity analysis which reflected a reconciliation of the fair value of the individual reporting units to the Company's total market capitalization and the estimated fair value of the Company's term loan. The market approach estimated the reporting unit's fair value based on various prices and financial ratios from similar publicly traded companies and market transactions. Based on the Company's goodwill assessment, the implied fair value of the Home Lending reporting unit was less than its carrying value and, as a result, we recorded a goodwill impairment charge of $8.4 million in the condensed consolidated statements of operations, representing all of the goodwill associated with the Home Lending reporting unit for the three and nine months ended September 30, 2017.
The fair value of the Structured Settlement finite-lived trade name intangible asset was determined primarily using a discounted cash flow approach that required considerable management judgment and long-term assumptions, and is considered a Level 3 (unobservable) fair value determination in the fair value hierarchy. Specifically, the "relief from royalty" method was used, which incorporated multi-year revenue projections. Key assumptions utilized in the fair value analysis included the following: (i) projected long-term growth rates in revenues directly attributable to the trade name, (ii) a discount rate, developed using cost of equity analysis and (iii) a royalty rate based on an analysis of royalty licensing data. As a result of this analysis, the fair value of the Structured Settlement finite-lived trade name exceeded its fair value.
During the nine months ended September 30, 2016, the Company determined the indefinite-lived trade name and the finite-lived customer relationships intangible assets within the Structured Settlements reporting unit were impaired and recorded an intangible assets impairment charge of $5.5 million comprised of $2.8 million for the indefinite-lived trade name and $2.7 million for the finite-lived customer relationships in its condensed consolidated statements of operations. The Company also determined that its trade name asset was a finite-lived intangible asset, and, consequently, a useful life of three years was assigned to the asset, which is the period the Company expects the asset to contribute directly or indirectly to future cash flows of the Company. Further, the Company determined that the remaining useful lives of its finite-lived intangible assets within the Structured Settlements reporting unit, namely databases and customer relationships, were less than previously assigned and consequently revised them to their currently estimated useful lives of approximately three years.
While management believes the assumptions used in its impairment assessment are reasonable and will continuously evaluate for future potential impairment indicators, there can be no assurance that estimates and assumptions made for purposes of impairment testing will prove to be accurate predictions of the future. Less than anticipated revenues generated by the Company's reporting units, an increase in the discount rate, and/or a decrease in the internal projected revenues used in the discounted cash flow model, among other items, could result in future impairment charges.


12
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


4. Fair Value Measurements
Under ASC 820, Fair Value Measurements and Disclosures ("ASC 820"), fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard focuses on the exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. U.S. GAAP establishes a fair value reporting hierarchy to maximize the use of observable inputs when measuring fair value and defines the three levels of inputs as noted below:
•
Level 1 — inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date.
•
Level 2 — inputs to the valuation methodology include quoted prices in markets that are not active or quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•
Level 3 — inputs to the valuation methodology are unobservable, reflecting the entity's own assumptions about assumptions market participants would use in pricing the asset or liability.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity specific measure. Therefore, even when market assumptions are not readily available, the Company's own assumptions are set to reflect those that market participants would use in pricing the assets or liabilities at the measurement date. The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company also evaluates various factors to determine whether certain transactions are orderly and may make adjustments to transactions or quoted prices when the volume and level of activity for an asset or liability have decreased significantly.
The above conditions could cause certain assets and liabilities to be reclassified from Level 1 to Level 2 or Level 3 or reclassified from Level 2 to Level 3. The inputs or methodology used for valuing the assets or liabilities are not necessarily an indication of the risk associated with the assets and liabilities.
The Company uses various valuation techniques and assumptions in estimating fair value. The assumptions used to estimate the value of the Company's assets and liabilities have varying degrees of impact to the overall fair value. This process involves the gathering of multiple sources of information, including broker quotes, values provided by pricing services, market indices and pricing matrices. When observable market prices for the asset or liability are not available, the Company employs various modeling techniques, such as discounted cash flow analysis, to estimate the fair value of the Company's assets and liabilities. For certain assets and liabilities, the Company developed internal models which are validated and calibrated regularly by management with assistance from third parties, as appropriate. Any models used to determine fair values, including the inputs and the assumptions therein, are reviewed as part of the Company's model validation process. The following describes the methods used in estimating the fair values of certain financial statement items:
For assets and liabilities measured at fair value in the Company's condensed consolidated financial statements:
Marketable securities, at fair value — The fair value of investments in marketable securities, which primarily consist of equity and fixed income securities, is based on quoted market prices.
VIE and other finance receivables, at fair value, and VIE long-term debt issued by securitization and permanent financing trusts, at fair value — The estimated fair value of VIE finance receivables, at fair value, other finance receivables, at fair value, and VIE long-term debt issued by securitization and permanent financing trusts, at fair value, is determined based on a discounted cash flow model using expected future collections and payments discounted at a calculated rate as described below.
For guaranteed structured settlements and annuities, the Company allocates the projected cash flows based on the waterfall of the securitization and permanent financing trusts (collectivity the "Trusts"). The waterfall includes fees to operate the Trusts (servicing fees, administrative fees, etc.), note holder principal and note holder interest. Many of the Trusts have various tranches of debt that have varying subordinations in the waterfall calculation. Refer to Note 13 for additional information. The remaining cash flows, net of those obligations, are considered a residual interest which is projected to be paid to the retained interest holder.
The projected finance receivable cash flows used to pay the obligations of the Trusts are discounted using a calculated rate derived from the fair value interest rates of the debt in the Trusts. The fair value interest rate of the debt is derived using a swap curve and applying a calculated spread that is based on either (i) market indices that are highly correlated with the spreads from the Company's previous securitizations and asset sales or (ii) the Company's most recent securitization or asset sale if it occurs within close proximity to the reporting date. The calculated spread is adjusted for the specific attributes of the debt in the

13
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


Trusts, such as years to maturity and credit grade. The debt's fair value interest rates are applied to the projected future cash payments paid on the principal and interest to derive the debt's fair value. The debt's fair value interest rates are blended using the debt's principal balance to obtain a weighted average fair value interest rate which is used to determine the value of the finance receivables' asset cash flows. In addition, the Company considers transformation costs and profit margin associated with its securitizations to derive the fair value of its finance receivables' asset cash flows. The finance receivables' residual cash flows remaining after the projected obligations of the Trusts are satisfied are discounted using a separate calculated rate (9.27% and 9.75% as of September 30, 2017 and December 31, 2016, respectively, with a weighted average life of 20 years as of both dates) that is derived from the fair value interest rates of the related debt.
The residual cash flows are adjusted for a loss assumption of 0.25% over the life of the finance receivables in its fair value calculation. Finance receivable cash flows, including the residual asset cash flows, are included in VIE and other finance receivables, at fair value, on the Company's condensed consolidated balance sheets. In connection with the refinancing of the Company's residual term facility (the "Residual Term Facility"), which was completed in September of 2016, the Company issued $207.5 million in notes collateralized by the residual asset cash flows and elected the fair value option, as permitted by ASC 825, Financial Instruments ("ASC 825"). The fair value interest rate of the debt is derived using the swap curve and applying a calculated spread based on market indices that are highly correlated with the spread from the related debt issued. Refer to Notes 12 and 13 for additional information. The associated debt's projected future cash payments for principal and interest are included in VIE long-term debt issued by securitization and permanent financing trusts, at fair value.
For finance receivables not yet securitized, the Company uses the calculated spreads based on market indices, while also considering transformation costs and profit margin to determine the fair value yield adjusting for expected losses and applying the residual yield for the cash flows the Company projects would make up the retained interest in a securitization. There are no material differences in valuation techniques, assumptions and inputs used to develop the Company's fair value measurements for finance receivables not securitized and those that are securitized.
For Life Contingent Structured Settlements ("LCSS") receivables, the Company uses the calculated spreads based on the principal market for the assets, reflecting the assumptions the Company believes market participants would use in pricing the asset, which is also used to determine the fair value of the debt cash flows.
Mortgage loans held for sale, at fair value — The fair value of mortgage loans held for sale is calculated using observable market information including pricing from actual market transactions, investor commitment prices, or broker quotations.
Mortgage servicing rights, at fair value — The Company uses a discounted cash flow approach to estimate the fair value of MSRs incorporating assumptions management believes market participants would use in determining fair value. The assumptions used in the estimation of the fair value of MSRs include contractual service fees, ancillary income and late fees, the cost of servicing, the discount rate, the float rate, the inflation rate, prepayment speeds and default rates.
Interest rate lock commitments, at fair value — The Company estimates the fair value of interest rate lock commitments ("IRLCs") based on the value of the underlying mortgage loan, quoted mortgage backed securities ("MBS") prices and estimates of the fair value of the MSRs and the probability, commonly referred to as the "pull-through" rates, that the mortgage loan will close within the terms of the IRLCs. These "pull-through" rates are based on the Company's historical data and reflect the Company's best estimate of the likelihood that a commitment will ultimately result in a closed loan.
VIE derivative liabilities, at fair value — The fair value of interest rate swaps is based on pricing models which consider current interest rates and the amount and timing of cash flows.
Forward sale commitments, at fair value — The fair value of forward sale commitments is based on pricing models which consider current interest rates and the amount and timing of cash flows.
Assets and liabilities for which fair value is only disclosed in the notes to the Company's condensed consolidated financial statements:
VIE and other finance receivables, net of allowances for losses — The fair value of structured settlement, annuity, and lottery receivables is estimated based on the present value of future expected cash flows using discount rates commensurate with the risks involved. The fair value of pre-settlement funding transactions and attorney cost financing is based on expected losses and historical loss experience associated with the respective receivables using management's best estimate of key assumptions regarding credit losses.
Other receivables, net of allowances for losses — The estimated fair value of advances receivable and certain other receivables, which are generally recovered in less than three months, is equal to the carrying amount. The carrying value of other receivables which have expected recoverability of greater than three months, which consist primarily of a note receivable, are

14
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


estimated based on the present value of future expected cash flows using management's best estimate of certain key assumptions, including discount rates commensurate with the risks involved.
Term loan payable — The estimated fair value of the term loan payable is based on market price quotations obtained from third parties.
VIE borrowings under revolving credit facilities and other similar borrowings — The estimated fair value of borrowings under revolving credit facilities and other similar borrowings is based on the borrowing rates for debt with similar terms and remaining maturities.
Other borrowings under revolving credit facilities and other similar borrowings — The estimated fair value of borrowings under revolving credit facilities and similar borrowings is based on the borrowing rates for debt with similar terms and remaining maturities.
VIE long-term debt — The estimated fair value of VIE long-term debt is based on borrowing rates available to the Company based on recently executed transactions with similar underlying collateral characteristics, reflecting the specific terms and conditions of the debt.
Installment obligations payable — Installment obligations payable is reported at contract value determined based on changes in the measuring indices selected by the obligees under the terms of the obligations over the length of the obligations. The fair value of installment obligations payable is estimated to be equal to the carrying value.
The following table sets forth the Company's assets and liabilities that are carried at fair value on the Company's condensed consolidated balance sheets as of:
 
Quoted Prices in Active
Markets for Identical Assets
Level 1
 
Significant Other
Observable Inputs
Level 2
 
Significant
Unobservable Inputs
Level 3
 
Total at
Fair Value
 
(In thousands)
September 30, 2017:
 

 
 

 
 

 
 

Assets
 

 
 

 
 

 
 

Marketable securities, at fair value
$
79,832

 
$
2,287

 
$
—

 
$
82,119

VIE and other finance receivables, at fair value
—

 
—

 
4,351,143

 
4,351,143

Mortgage loans held for sale, at fair value
—

 
239,477

 
—

 
239,477

Mortgage servicing rights, at fair value
—

 
—

 
50,018

 
50,018

Interest rate lock commitments, at fair value (1)
—

 
—

 
16,268

 
16,268

Forward sale commitments, at fair value (1)
—

 
1,848

 
—

 
1,848

Total Assets
$
79,832

 
$
243,612

 
$
4,417,429

 
$
4,740,873

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

VIE derivative liabilities, at fair value
$
—

 
$
43,494

 
$
—

 
$
43,494

VIE long-term debt issued by securitization and permanent financing trusts, at fair value
—

 
—

 
4,200,824

 
4,200,824

Total Liabilities
$
—

 
$
43,494

 
$
4,200,824

 
$
4,244,318

(1) Included in other assets on the Company's condensed consolidated balance sheets.


15
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


 
Quoted Prices in Active
Markets for Identical Assets
Level 1
 
Significant Other
Observable Inputs
Level 2
 
Significant
Unobservable Inputs
Level 3
 
Total at
Fair Value
 
(In thousands)
December 31, 2016
 

 
 

 
 

 
 

Assets
 

 
 

 
 

 
 

Marketable securities, at fair value
$
74,421

 
$
2,266

 
$
—

 
$
76,687

VIE and other finance receivables, at fair value
—

 
—

 
4,157,037

 
4,157,037

Mortgage loans held for sale, at fair value
—

 
232,770

 
—

 
232,770

Mortgage servicing rights, at fair value
—

 
—

 
41,697

 
41,697

Interest rate lock commitments, at fair value (1)
—

 
—

 
6,072

 
6,072

Forward sale commitments, at fair value (1)
—

 
659

 
—

 
659

Total Assets
$
74,421

 
$
235,695

 
$
4,204,806

 
$
4,514,922

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

VIE derivative liabilities, at fair value
$
—

 
$
50,432

 
$
—

 
$
50,432

VIE long-term debt issued by securitization and permanent financing trusts, at fair value
—

 
—

 
4,014,450

 
4,014,450

Total Liabilities
$
—

 
$
50,432

 
$
4,014,450

 
$
4,064,882

(1) Included in other assets on the Company's condensed consolidated balance sheets.

16
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


The following table sets forth the Company's quantitative information about its Level 3 fair value measurements as of: 
 
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Input
 
Range (Weighted Average)
 
 
(In thousands)
 
 
 
 
 
 
September 30, 2017
 
 

 
 
 
 
 
 
Assets
 
 

 
 
 
 
 
 
VIE and other finance receivables, at fair value
 
$
4,351,143

 
Discounted cash flow
 
Discount rate
 
2.99% - 10.23% (3.81%)
Mortgage servicing rights, at fair value
 
50,018

 
Discounted cash flow
 
Discount rate
 
9.50% - 14.65% (10.07%)
 
Prepayment speed
 
6.05% - 23.30% (8.81%)
 
Cost of servicing
 
$65 - $90 ($73)
Interest rate lock commitments, at fair value
 
16,268

 
Internal model
 
Pull-through rate
 
5.91% - 99.63% (63.06%)
Total Assets
 
$
4,417,429

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 
 
 
 
 
VIE long-term debt issued by securitization and permanent financing trusts, at fair value
 
$
4,200,824

 
Discounted cash flow
 
Discount rate
 
1.71% - 10.23% (3.75%)
Total Liabilities
 
$
4,200,824

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 

 
 
 
 
 
 
Assets
 
 

 
 
 
 
 
 
VIE and other finance receivables, at fair value
 
$
4,157,037

 
Discounted cash flow
 
Discount rate
 
3.16% - 12.77% (4.32%)
Mortgage servicing rights, at fair value
 
41,697

 
Discounted cash flow
 
Discount rate
 
9.50% - 14.06% (10.11%)
 
 
 
Prepayment speed
 
6.04% - 21.82% (7.96%)
 
 
 
Cost of servicing
 
$65 - $90 ($73)
Interest rate lock commitments, at fair value
 
6,072

 
Internal model
 
Pull-through rate
 
37.25% - 97.00% (79.53%)
Total Assets
 
$
4,204,806

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 
 
 
 
 
VIE long-term debt issued by securitization and permanent financing trusts, at fair value
 
$
4,014,450

 
Discounted cash flow
 
Discount rate
 
1.47% - 11.91% (4.25%)
Total Liabilities
 
$
4,014,450

 
 
 
 
 
 
A significant unobservable input used in the fair value measurement of most of the Company's assets and liabilities measured at fair value using unobservable inputs (Level 3) is the discount rate. Significant decreases (increases) in the discount rate used to estimate fair value in isolation would result in a significantly higher (lower) fair value measurement of the corresponding asset or liability. Additional significant unobservable inputs used in the fair value measurement of mortgage servicing rights, at fair value, are prepayment speed, cost of servicing and pull-through rate. Significant decreases (increases) in the prepayment speed used to estimate the fair value of MSRs in isolation would result in a significantly higher (lower) fair value measurement. Significant decreases (increases) in the cost of servicing used to estimate the fair value of MSRs in isolation would result in a significantly higher (lower) fair value measurement. Significant increases (decreases) in the pull-through rate used to estimate the fair value of IRLCs in isolation would result in a significantly higher (lower) fair value measurement.

17
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


The changes in assets measured at fair value using significant unobservable inputs (Level 3) during the nine months ended September 30, 2017 and 2016 were as follows:
 
VIE and other 
finance receivables, 
at fair value
 
Mortgage servicing rights, at fair value
 
Interest rate lock commitments, at fair value
 
Total
 
(In thousands)
Balance as of December 31, 2016
$
4,157,037

 
$
41,697

 
$
6,072

 
$
4,204,806

Total included in earnings (losses):
 

 
 
 
0

 
 
Unrealized gains
241,310

 
8,321

 
16,268

 
265,899

Realized gain on sale of finance receivable
2,180

 
—

 
—

 
2,180

Included in other comprehensive gain
—

 
—

 
—

 
—

Purchases of finance receivables
215,504

 
—

 
—

 
215,504

Interest accreted
131,837

 
—

 
—

 
131,837

Payments received
(381,672
)
 
—

 
—

 
(381,672
)
Sale of finance receivables
(15,053
)
 
—

 
—

 
(15,053
)
Transfers to other balance sheet line items
—

 
—

 
(6,072
)
 
(6,072
)
Transfers in (out) of Level 3
—

 
—

 
—

 
—

Balance as of September 30, 2017
$
4,351,143

 
$
50,018

 
$
16,268

 
$
4,417,429

The amount of net gains for the period included in revenues attributable to the change in unrealized gains or losses relating to assets still held as of:
 
 
 
 
 
 
 
September 30, 2017
$
241,310

 
$
8,321

 
$
16,268

 
$
265,899

 
 
 
 
 
 
 
 
Balance as of December 31, 2015
$
4,386,147

 
$
29,287

 
$
4,934

 
$
4,420,368

Total included in earnings:
 

 
 
 
0

 
 
Unrealized gains
92,880

 
3,320

 
13,346

 
109,546

Realized gain on sale of finance receivable
69,597

 
—

 
—

 
69,597

Included in other comprehensive gain
—

 
—

 
—

 
—

Purchases of finance receivables
204,775

 
—

 
—

 
204,775

Interest accreted
131,392

 
—

 
—

 
131,392

Payments received
(384,478
)
 
—

 
—

 
(384,478
)
Sale of finance receivables
(271,331
)
 
—

 
—

 
(271,331
)
Transfers to other balance sheet line items
—

 
—

 
(4,934
)
 
(4,934
)
Transfers in (out) of Level 3
—

 
—

 
—

 
—

Balance as of September 30, 2016
$
4,228,982

 
$
32,607

 
$
13,346

 
$
4,274,935

The amount of net gains for the period included in revenues attributable to the change in unrealized gains or losses relating to assets still held as of:
 
 
 
 
 
 
 
September 30, 2016
$
92,880

 
$
3,320

 
$
13,346

 
$
109,546

    

18
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


The changes in liabilities measured at fair value using significant unobservable inputs (Level 3) during the nine months ended September 30, 2017 and 2016 were as follows:
 
 
VIE long-term debt issued 
by securitizations and 
permanent financing 
trusts, at fair value
 
 
(In thousands)
Balance as of December 31, 2016
 
$
4,014,450

Total included in (earnings) losses:
 
 

Unrealized losses
 
161,447

Issuances
 
279,835

Interest accreted
 
(6,505
)
Repayments
 
(248,403
)
Transfers in (out) of Level 3
 
—

Balance as of September 30, 2017
 
$
4,200,824

The amount of net losses for the period included in revenues attributable to the change in unrealized gains or losses relating to long-term debt still held as of:
 
 

September 30, 2017
 
$
161,447

 
 
 

Balance as of December 31, 2015
 
$
3,928,818

Total included in (earnings) losses:
 
 

Unrealized losses
 
167,243

Issuances
 
216,806

Interest accreted
 
(26,864
)
Repayments
 
(240,340
)
Transfers in (out) of Level 3
 
—

Balance as of September 30, 2016
 
$
4,045,663

The amount of net losses for the period included in revenues attributable to the change in unrealized gains or losses relating to long-term debt still held as of:
 
 

September 30, 2016
 
$
167,243


19
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


Realized and unrealized gains and losses included in revenues in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016 are reported in the following asset line items:
 
 
VIE and other finance receivables and long-term debt, at fair value
 
Mortgage servicing rights, at fair value
 
Interest rate lock commitments, at fair value
 
 
(In thousands)
Three Months Ended September 30, 2017
 
 
 
 
 
 
Net gains included in revenues
 
$
34,004

 
$
3,240

 
$
16,268

Unrealized gains relating to assets and long-term debt still held as of end of period
 
$
32,346

 
$
3,240

 
$
16,268

 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
 
 
 
 
 
Net gains included in revenues
 
$
82,043

 
$
8,321

 
$
16,268

Unrealized gains relating to assets and long-term debt still held as of end of period
 
$
79,863

 
$
8,321

 
$
16,268

 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 
 
 
 
 
 
Net (losses) gains included in revenues
 
$
(14,238
)
 
$
1,480

 
$
13,346

Unrealized (losses) gains relating to assets and long-term debt still held as of end of period
 
$
(29,616
)
 
$
1,480

 
$
13,346

 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
 
 
 
 
 
Net (losses) gains included in revenues
 
$
(4,766
)
 
$
3,320

 
$
13,346

Unrealized (losses) gains relating to assets and long-term debt still held as of end of period
 
$
(74,363
)
 
$
3,320

 
$
13,346


20
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


The Company discloses fair value information about financial instruments, whether or not recorded at fair value on the Company's condensed consolidated balance sheets, for which it is practicable to estimate that value. As such, the estimated fair values of the Company's financial instruments were as follows:
 
 
September 30, 2017
 
December 31, 2016
 
 
Estimated
Fair
Value
 
Carrying
Amount
 
Estimated
Fair
Value
 
Carrying
Amount
 
 
(In thousands)
Financial assets:
 
 

 
 

 
 

 
 

VIE and other finance receivables, at fair value
 
$
4,351,143

 
$
4,351,143

 
$
4,157,037

 
$
4,157,037

VIE and other finance receivables, net of allowance for losses (1)
 
84,086

 
85,606

 
88,300

 
93,944

Other receivables, net of allowance for losses (1)
 
19,687

 
19,687

 
17,771

 
17,771

Mortgage loans held for sale, at fair value
 
239,477

 
239,477

 
232,770

 
232,770

Mortgage servicing rights, at fair value
 
50,018

 
50,018

 
41,697

 
41,697

Marketable securities, at fair value
 
82,119

 
82,119

 
76,687

 
76,687

Interest rate lock commitments, at fair value (2)
 
16,268

 
16,268

 
6,072

 
6,072

Forward sale commitments, at fair value (2)
 
1,848

 
1,848

 
659

 
659

Financial liabilities:
 
 
 
 

 
 

 
 

Term loan payable (1)
 
214,636

 
438,148

 
242,730

 
431,872

VIE derivative liabilities, at fair value
 
43,494

 
43,494

 
50,432

 
50,432

VIE borrowings under revolving credit facilities and other similar borrowings (1) (3)
 
2,258

 
1,735

 
58,798

 
56,432

Other borrowings under revolving credit facilities and other similar borrowings (1)
 
230,597

 
231,002

 
229,221

 
229,588

VIE long-term debt (1)
 
57,118

 
59,586

 
57,268

 
62,939

VIE long-term debt issued by securitization and permanent financing trusts, at fair value
 
4,200,824

 
4,200,824

 
4,014,450

 
4,014,450

Installment obligations payable (1)
 
82,119

 
82,119

 
76,687

 
76,687

(1) These represent financial instruments not recorded on the condensed consolidated balance sheets at fair value. Such financial instruments would be classified as Level 3 within the fair value hierarchy. 
(2) Included in other assets on the Company's condensed consolidated balance sheets.
(3) The carrying amount includes the unamortized portion of the debt issuance costs in connection with the JGW V borrowing facility.

21
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


5. VIE and Other Finance Receivables, at Fair Value 
The Company has elected to fair value newly originated guaranteed structured settlements in accordance with ASC 825. The Company also elected to fair value newly originated lottery winnings effective January 1, 2013. VIE and other finance receivables for which the fair value option was elected consist of the following:
 
 
September 30, 2017
 
December 31, 2016
 
 
(In thousands)
Maturity value
 
$
6,691,841

 
$
6,584,344

Unearned income
 
(2,340,698
)
 
(2,427,307
)
Net carrying amount
 
$
4,351,143

 
$
4,157,037

Encumbrances on VIE and other finance receivables, at fair value were as follows:
Encumbrance
 
September 30, 2017
 
December 31, 2016
 
 
(In thousands)
VIE long-term debt issued by securitization and permanent financing trusts (2)
 
$
4,325,032

 
$
4,060,069

$100.0 million credit facility (JGW-S III) (1)
 
—

 
27,966

$200.0 million credit facility (JGW V) (1)
 
5,232

 
55,868

Encumbered VIE finance receivables
 
4,330,264

 
4,143,903

Unencumbered
 
20,879

 
13,134

Total VIE and other finance receivables, at fair value
 
$
4,351,143

 
$
4,157,037

(1) Refer to Note 10.
(2) Refer to Note 13.
As of September 30, 2017 and December 31, 2016, the unsecuritized finance receivables, at fair value, were $26.1 million and $97.0 million, respectively, and were included within VIE finance receivables, at fair value and other finance receivables, at fair value on the Company's condensed consolidated balance sheets.
In March 2017, the Company entered into an Asset Sale Facility agreement (the "Asset Sale Facility") to sell up to $50.0 million of discounted total receivable balances ("TRB") purchases, which can be increased to $75.0 million by mutual agreement of the parties, and has a duration of one year. During the three months ended September 30, 2017, the Company sold $11.1 million of TRB purchases pursuant to the Asset Sale Facility, which was accounted for as a direct asset sale, for $6.2 million, and the Company recognized a $0.5 million gain. During the nine months ended September 30, 2017, the Company sold $19.8 million of TRB purchases pursuant to the Asset Sale Facility, which was accounted for as a direct asset sale, for $11.9 million, and the Company recognized a $1.0 million gain. The gains were included in realized and unrealized gains (losses) on VIE and other finance receivables, long-term debt and derivatives in the Company's condensed consolidated statements of operations. No servicing asset or liability was recognized in connection with the Company's direct asset sale.
On June 30, 2017, the Company executed a second Asset Sale Facility agreement (the "Second Asset Sale Facility") to sell up to $5.0 million of discounted TRB purchases, which can be increased to $25.0 million by mutual agreement of the parties, and has a duration of one year. On September 28, 2017, the Company increased the capacity of its Second Asset Sale Facility to $15.0 million. During the three and nine months ended September 30, 2017, the Company sold $20.6 million of TRB purchases pursuant to the Second Asset Sale Facility, which was accounted for as a direct asset sale, for $3.1 million, and the Company recognized a $1.1 million gain. The gains were included in realized and unrealized gains (losses) on VIE and other finance receivables, long-term debt and derivatives in the Company's condensed consolidated statements of operations. No servicing asset or liability was recognized in connection with the Company's direct asset sale.
In February 2016, the Company completed a sale of the first pool of assets associated with its 2016-1 direct asset sale in which $151.5 million of TRB purchases were sold for $91.3 million, and the Company recognized a $21.7 million gain. In April 2016, the Company completed a sale of the second pool of assets associated with its 2016-1 direct asset sale in which $115.8 million of TRB purchases were sold for $70.0 million and realized an $18.6 million gain. In June 2016, the Company completed a sale of the first pool of assets associated with its 2016-2 direct asset sale in which $81.3 million of TRB purchases were sold for $50.8 million. In conjunction with this transaction, the Company realized a $13.9 million gain. In August 2016, the Company completed a sale of the second pool of assets associated with its 2016-2 direct asset sale in which $93.6 million of TRB purchases were sold for $59.2 million, and the Company realized a $15.4 million gain. The aforementioned gains were included in realized and unrealized gains (losses) on VIE and other finance receivables, long-term debt and derivatives in the Company's condensed

22
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


consolidated statement of operations. No servicing asset or liability was recognized in connection with the Company's direct asset sales.
The Company services certain finance receivables it sold to third parties. Servicing fee revenue related to those receivables is included in servicing, broker, and other fees in the Company's condensed consolidated statements of operations, and was as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(In thousands)
Servicing fee income
 
$
249

 
$
245

 
$
751

 
$
679



23
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


6. VIE and Other Finance Receivables, net of Allowance for Losses
The Company did not elect the fair value option for VIE and other finance receivables, net of allowance for losses, which consist of the following:
 
 
September 30, 2017
 
December 31, 2016
 
 
(In thousands)
Structured settlements and annuities
 
$
65,275

 
$
67,872

Less: unearned income
 
(39,572
)
 
(42,030
)
 
 
25,703

 
25,842

Lottery winnings
 
58,803

 
63,957

Less: unearned income
 
(14,505
)
 
(16,799
)
 
 
44,298

 
47,158

Pre-settlement funding transactions
 
26,180

 
31,853

Less: unearned income
 
(358
)
 
(441
)
 
 
25,822

 
31,412

Attorney cost financing
 
404

 
616

Less: unearned income
 
—

 
—

 
 
404

 
616

VIE and other finance receivables
 
96,227

 
105,028

Less: allowance for losses
 
(10,621
)
 
(11,084
)
VIE and other finance receivables, net of allowances
 
$
85,606

 
$
93,944

Encumbrances on VIE and other finance receivables, net of allowance for losses, were as follows:
Encumbrance
 
September 30, 2017
 
December 31, 2016
 
 
(In thousands)
VIE long-term debt (1)
 
$
65,951

 
$
69,354

VIE and encumbered securitized debt
 
65,951

 
69,354

VIE unencumbered assets
 
11,689

 
15,971

Non-VIE unencumbered assets
 
7,966

 
8,619

Unencumbered
 
19,655

 
24,590

Total VIE and other finance receivables, net of allowances
 
$
85,606

 
$
93,944

(1) Refer to Note 12.

24
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


Activity in the allowance for losses for VIE and other finance receivables is as follows:
 
Structured settlements and annuities
 
Lottery winnings
 
Pre-settlement
funding transactions
 
Attorney cost
financing
 
Total
 
(In thousands)
Three Months Ended September 30, 2017
 

 
 

 
 

 
 

 
 

Allowance for losses:
 
 
 
 
 
 
 
 
 
Balance as of June 30, 2017
$
93

 
$
—

 
$
10,625

 
$
284

 
$
11,002

Provision for loss
3

 
1

 
575

 
—

 
579

Charge-offs
(9
)
 
(1
)
 
(955
)
 
—

 
(965
)
Recoveries
5

 
—

 
—

 
—

 
5

Balance as of September 30, 2017
$
92

 
$
—

 
$
10,245

 
$
284

 
$
10,621

 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 

 
 

 
 

 
 

 
 

Allowance for losses:
 

 
 

 
 

 
 

 
 

Balance as of December 31, 2016
$
93

 
$
—

 
$
10,707

 
$
284

 
$
11,084

Provision (credit) for loss
10

 
(12
)
 
1,855

 
—

 
1,853

Charge-offs
(24
)
 
12

 
(2,317
)
 
—

 
(2,329
)
Recoveries
13

 
—

 
—

 
—

 
13

Balance as of September 30, 2017
$
92

 
$
—

 
$
10,245

 
$
284

 
$
10,621

 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
92

 
$
—

 
$
1,900

 
$
284

 
$
2,276

Collectively evaluated for impairment
—

 
—

 
8,345

 
—

 
8,345

Balance as of September 30, 2017
$
92

 
$
—

 
$
10,245

 
$
284

 
$
10,621

 
 
 
 
 
 
 
 
 
 
VIE and other finance receivables, net:
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
25,611

 
$
44,298

 
$
114

 
$
120

 
$
70,143

Collectively evaluated for impairment
—

 
—

 
15,463

 
—

 
15,463

Balance as of September 30, 2017
$
25,611

 
$
44,298

 
$
15,577

 
$
120

 
$
85,606

 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 

 
 

 
 

 
 

 
 

Allowance for losses:
 

 
 

 
 

 
 

 
 

Balance as of June 30, 2016
$
68

 
$
—

 
$
9,863

 
$
284

 
$
10,215

Provision for loss
23

 
11

 
1,377

 
—

 
1,411

Charge-offs
(1
)
 
(11
)
 
(544
)
 
—

 
(556
)
Recoveries
5

 
—

 
—

 
—

 
5

Balance as of September 30, 2016
$
95

 
$
—

 
$
10,696

 
$
284

 
$
11,075

 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 

 
 

 
 

 
 

 
 

Allowance for losses:
 

 
 

 
 

 
 

 
 

Balance as of December 31, 2015
$
69

 
$
—

 
$
10,013

 
$
284

 
$
10,366

(Credit) provision for loss
(79
)
 
7

 
3,144

 
—

 
3,072

Charge-offs
(32
)
 
(7
)
 
(2,461
)
 
—

 
(2,500
)
Recoveries
137

 
—

 
—

 
—

 
137

Balance as of September 30, 2016
$
95

 
$
—

 
$
10,696

 
$
284

 
$
11,075

 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
95

 
$
—

 
$
2,533

 
$
284

 
$
2,912

Collectively evaluated for impairment
—

 
—

 
8,163

 
—

 
8,163

Balance as of September 30, 2016
$
95

 
$
—

 
$
10,696

 
$
284

 
$
11,075

 
 
 
 
 
 
 
 
 
 
VIE and other finance receivables, net:
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
25,731

 
$
48,575

 
$
32

 
$
372

 
$
74,710

Collectively evaluated for impairment
—

 
—

 
21,466

 
—

 
21,466

Balance as of September 30, 2016
$
25,731

 
$
48,575

 
$
21,498

 
$
372

 
$
96,176

Management makes estimates in determining the allowance for losses on finance receivables. Consideration is given to a variety of factors in establishing these estimates, including current economic conditions and delinquency rates. Because the

25
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


allowance for losses is dependent on general and other economic conditions beyond the Company's control, it is possible that the estimate for the allowance for losses could differ materially from the currently reported amount in the near term.
The Company suspends recognizing interest income on a receivable when it is probable that the Company will be unable to collect all payments according to the contractual terms of the underlying agreement. Management considers all information available in assessing collectability. Collectability is measured on a receivable-by-receivable basis by either the present value of estimated future cash flows discounted at the effective rate, the observable market price for the receivable or the fair value of the collateral if the receivable is collateral dependent. Large groups of smaller balance homogeneous receivables, such as pre-settlement funding transactions, are collectively assessed for collectability.
Payments received on past due receivables and finance receivables on which the Company has suspended recognizing revenue are applied first to principal and then to interest income. Additionally, the Company generally does not resume recognition of interest income once it has been suspended. As of September 30, 2017 and December 31, 2016, the Company had discontinued recognition of income on pre-settlement funding transactions in the amount of $12.0 million and $14.7 million, respectively, and attorney cost financing receivables in the amount of $0.4 million and $0.4 million, respectively.
Pre-settlement funding transactions and attorney cost financing are usually outstanding for a period of time exceeding one year. The Company assesses the status of the individual pre-settlement funding transactions to determine whether there are any case specific concerns that need to be addressed and included in the allowance for losses on finance receivables. The Company also analyzes pre-settlement funding transactions on a portfolio basis based on the age of the advances, as the ability to collect is correlated to the duration of time the advances are outstanding. The Company decided, beginning in April 2015, to curtail its purchases of pre-settlement transactions and has not purchased any in 2016 or 2017. 
The following table presents gross finance receivables related to pre-settlement funding transactions based on their year of origination as of:
Year of Origination
 
September 30, 2017
 
December 31, 2016
 
 
(In thousands)
2009
 
$
394

 
$
690

2010
 
1,688

 
1,848

2011
 
2,979

 
3,891

2012
 
3,495

 
4,279

2013
 
2,952

 
5,390

2014
 
12,446

 
13,085

2015
 
2,226

 
2,670

Total
 
$
26,180

 
$
31,853

Based on historical portfolio experience, the Company reserved for pre-settlement funding transactions and attorney cost financing in the amounts of $10.2 million and $0.3 million, respectively, as of September 30, 2017, and in the amounts of $10.7 million and $0.3 million, respectively, as of December 31, 2016.

26
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


The following table presents portfolio delinquency status excluding pre-settlement funding transactions and attorney cost financing as of:
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
Greater
than
90 Days
 
Total
Past Due
 
Current
 
VIE and Other
Finance
Receivables,
net
 
VIE and Other
Finance
Receivables, net
> 90 days
accruing
 
(In thousands)
September 30, 2017
 

 
 

 
 

 
 

 
 

 
 

 
 

Structured settlements and annuities
$
14

 
$
12

 
$
144

 
$
170

 
$
25,441

 
$
25,611

 
$
—

Lottery winnings
2

 
1

 
259

 
262

 
44,036

 
44,298

 
—

Total
$
16

 
$
13

 
$
403

 
$
432

 
$
69,477

 
$
69,909

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 

 
 

 
 

 
 

 
 

 
 

 
 

Structured settlements and annuities
$
11

 
$
5

 
$
88

 
$
104

 
$
25,645

 
$
25,749

 
$
—

Lottery winnings
—

 
4

 
205

 
209

 
46,949

 
47,158

 
—

Total
$
11

 
$
9

 
$
293

 
$
313

 
$
72,594

 
$
72,907

 
$
—

Pre-settlement funding transactions and attorney cost financing do not have set due dates as payment is dependent on the underlying case settling.

27
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


7. Mortgage Loans Held for Sale, at Fair Value
Mortgage loans held for sale, at fair value, were as follows:
 
 
September 30, 2017
 
December 31, 2016
 
 
(In thousands)
Unpaid principal balance of mortgage loans held for sale
 
$
231,406

 
$
230,261

Fair value adjustment
 
8,071

 
2,509

Mortgage loans held for sale, at fair value
 
$
239,477

 
$
232,770

A reconciliation of the changes in mortgage loans held for sale, at fair value, is presented in the following table:
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
 
(In thousands)
Balance at beginning of period
 
$
232,770

 
$
124,508

Originations and purchases of mortgage loans held for sale, net of fees
 
2,591,803

 
2,462,754

Proceeds from sale of and principal payments on mortgage loans held for sale
 
(2,619,812
)
 
(2,343,415
)
Net change in fair value of mortgage loans held for sale
 
34,716

 
64,643

Balance at end of period
 
$
239,477

 
$
308,490

As the named servicer, the Company has the option to purchase any individual loan in a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. In accordance with ASC 860, Transfers and Servicing, the Company recorded an asset and a corresponding liability, included within other assets and other liabilities on the Company's condensed consolidated balance sheets, equal to the principal amount of the loans of $38.0 million and $39.7 million as of September 30, 2017 and December 31, 2016, respectively.
For the three months ended September 30, 2017 and 2016, the Company repurchased $2.8 million and $1.2 million, respectively, of mortgage loans from Ginnie Mae securitization pools with the intent to re-pool them into new Ginnie Mae securitizations or otherwise to sell to third-party investors.
For the nine months ended September 30, 2017 and 2016, the Company repurchased $10.5 million and $13.8 million, respectively, of mortgage loans from Ginnie Mae securitization pools with the intent to re-pool them into new Ginnie Mae securitizations or otherwise to sell to third-party investors.
The Company did not have any mortgage loans held for sale on non-accrual status or any mortgage loans held for sale greater than 90 days past due as of September 30, 2017 or December 31, 2016.
Loan Servicing and Repurchase Reserve
Mortgage loans sold to investors by the Company which met investor and agency underwriting guidelines at the time of sale may be subject to repurchase in the event of specific default by the borrower, subsequent discovery that underwriting standards were not met or breach of representations and warranties made by the Company. In the event of a breach of the Company's representations and warranties, the Company may be required to either repurchase the mortgage loans with identified defects or indemnify the investors. The Company has established a reserve for potential losses related to these representations and warranties. The Company has also established a reserve for potential losses related to impaired loans within its servicing portfolio. In assessing the adequacy of the reserve, the Company evaluates various factors, including actual write-offs during the period, historical loss experience, known delinquent loans and GSE guidelines. Actual losses incurred are reflected as write-offs against the reserve liability. The loan servicing and repurchase reserve is included within other liabilities on the Company's condensed consolidated balance sheets. The associated expense is included in the provision for losses in the Company's condensed consolidated statements of operations.

28
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


The activity in the loan servicing and repurchase reserve was as follows:
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
 
(In thousands)
Balance at beginning of period
 
$
3,010

 
$
2,575

Provision for loan servicing and repurchases
 
1,066

 
1,576

Write-offs, net
 
(1,375
)
 
(1,553
)
Balance at end of period
 
$
2,701

 
$
2,598

Due to the uncertainty in the various estimates with the loan servicing and repurchase reserve, there may be a range of losses in excess of the recorded loan servicing and repurchase reserve that is reasonably possible. The estimate of the range of possible loss does not represent a probable loss, and is based on current available information, significant judgment, and several assumptions that are subject to change.

29
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


8. Mortgage Servicing Rights, at Fair Value
The activity of MSRs was as follows:
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
 
(In thousands)
Balance at beginning of period
 
$
41,697

 
$
29,287

Additions due to loans sold, servicing retained
 
14,732

 
11,404

Reductions due to loan payoffs and foreclosures
 
(6,033
)
 
(5,007
)
Fair value adjustment
 
(378
)
 
(3,077
)
Balance at end of period
 
$
50,018

 
$
32,607

The unpaid principal balance of mortgage loans serviced was $4.9 billion as of September 30, 2017 and $4.1 billion as of December 31, 2016.
The key assumptions used in determining the fair value of the Company's MSRs were as follows:
 
 
September 30, 2017
 
December 31, 2016
 
 
Range (Weighted Average)
Discount rate
 
9.50% - 14.65% (10.07%)
 
9.50% - 14.06% (10.11%)
Prepayment speed
 
6.05% - 23.30% (8.81%)
 
6.04% - 21.82% (7.96%)
Cost of servicing
 
$65 - $90 ($73)
 
$65 - $90 ($73)
The hypothetical effect of an adverse change in these key assumptions that would result in a decrease in fair values are as follows:
 
 
September 30, 2017
 
December 31, 2016
 
 
(In thousands)
Discount rate:
 
 
 
 
Effect on value - 100 basis points adverse change
 
$
(1,874
)
 
$
(1,612
)
Effect on value - 200 basis points adverse change
 
$
(3,617
)
 
$
(3,109
)
Prepayment speed:
 
 
 
 
Effect on value - 5% adverse change
 
$
(840
)
 
$
(686
)
Effect on value - 10% adverse change
 
$
(1,655
)
 
$
(1,370
)
Cost of servicing:
 
 
 
 
Effect on value - 5% adverse change
 
$
(378
)
 
$
(327
)
Effect on value - 10% adverse change
 
$
(756
)
 
$
(653
)
These sensitivities are hypothetical and should be used with caution. As the table demonstrates, the Company's methodology for estimating the fair value of MSRs is highly sensitive to changes in assumptions. For example, actual prepayment experience may differ and any difference may have a material effect on the fair value of MSRs. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the table, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption; however, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may indicate higher prepayments; however, this may be partially offset by lower prepayment due to other factors such as a borrower's diminished opportunity to refinance), which may magnify or counteract the sensitivities. Thus, any measurement of the fair value of MSRs is limited by the conditions existing and assumptions made as of a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time.

30
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


9. Term Loan Payable
The Company has a senior secured credit facility (the "Credit Facility") that consists of a term loan (the "Term Loan") with an outstanding principal balance of $449.5 million as of September 30, 2017 and December 31, 2016. There are no principal payments due on the Term Loan until its maturity in February 2019. The Credit Facility's revolving commitment of $20.0 million matured in August 2017, with an outstanding principal balance of $0.0 million, and was not renewed. Certain of the Company's subsidiaries are guarantors of the Credit Facility and substantially all of the non-securitized and non-collateralized assets of the Company are pledged as security for the repayment of borrowings outstanding under the Credit Facility.
At each interest reset date, the Company has the option to elect that the Term Loan be either a Eurodollar loan or a Base Rate loan. If a Eurodollar loan, interest on the Term Loan accrues at either LIBOR or 1.00% (whichever is greater) plus a spread of 6.00%. If a Base Rate loan, interest accrues at Prime or 2.00% (whichever is greater) plus a spread of 5.00%. As of September 30, 2017 and December 31, 2016, the interest rate on the Term Loan was 7.31% and 7.00%, respectively, as it is currently a Eurodollar loan. The revolving commitment had the same interest rate terms as the Term Loan. In addition, the revolving commitment was subject to an unused fee of 0.5% per annum and provided for the issuance of letters of credit equal to $10.0 million, subject to customary terms and fees.
The Credit Facility required the Company, to the extent that as of the last day of any fiscal quarter there were outstanding balances on the revolving commitment that exceeded specific thresholds (generally 15% of the $20.0 million borrowing capacity, or $3.0 million), to comply with a maximum total leverage ratio. The total leverage ratio was calculated by dividing total funded debt (as defined in the Credit Facility) less unrestricted cash and cash equivalents by Consolidated Adjusted Earnings Before Interest Expense, Income Taxes, Depreciation and Amortization (as defined in the Credit Facility) for the period of the four fiscal quarters most recently ended. As of September 30, 2017, the maximum total leverage ratio is no longer applicable because the revolving commitment under the Credit Facility matured in August 2017 and was not renewed. The maximum required total leverage ratio was 4.75 to 1.00 as of December 31, 2016. As of December 31, 2016, there were no outstanding borrowings under the revolving commitment, and, as a result, the maximum total leverage ratio requirement pertaining to the $20.0 million revolving commitment was not applicable. Had the leverage ratio requirement been applicable as of December 31, 2016, the Company would not have satisfied the maximum total leverage ratio requirement and would have been required to repay the outstanding borrowings on the revolver in excess of the specified threshold.
The Credit Facility also limits the Company and certain of its subsidiaries from engaging in certain activities, including incurring additional indebtedness and liens, making investments, transacting with affiliates, disposing of assets and various other activities. In addition, the Credit Facility limits, with certain exceptions, certain of the Company's subsidiaries from paying cash dividends and making loans to the Company, the calculation of which is performed annually as of the end of each fiscal year. Under the terms of the calculation, $0.3 million of the Company's $40.4 million in stockholders' deficit as of December 31, 2016 was free of limitations on the payment of dividends.
Interest expense relating to the Term Loan for the three months ended September 30, 2017 and 2016 was $10.5 million and $10.2 million, respectively. Interest expense relating to the Term Loan for the nine months ended September 30, 2017 and 2016 was $30.8 million and $30.4 million, respectively.

31
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


10. VIE Borrowings Under Revolving Credit Facilities and Other Similar Borrowings
VIE borrowings under revolving credit facilities and other similar borrowings on the Company's condensed consolidated balance sheets consist of the following as of:
 
Entity
 
September 30, 2017
 
December 31, 2016
 
 
 
(In thousands)
$100.0 million variable funding note facility with interest payable monthly (6.50% as of December 31, 2016), and is collateralized by JGW-S III, LLC's ("JGW-S III") structured settlements receivables. JGW-S III is charged monthly an unused fee of 0.75% per annum for the undrawn balance of its line of credit. This facility was terminated on September 25, 2017.
JGW-S III
 
$
—

 
$
18,912

$200.0 million multi-tranche and lender credit facility with interest payable monthly as follows: Tranche A rate is 3.30% plus either the LIBOR or the Commercial Paper rate depending on the lender (4.75% at September 30, 2017 and 3.92% and 4.43% at December 31, 2016); Tranche B rate is 5.80% plus LIBOR (7.25% as of September 30, 2017 and 6.42% at December 31, 2016). The commitment period ends on November 30, 2017 and is collateralized by JGW V, LLC's ("JGW V") structured settlements, annuity and lottery receivables. JGW V is charged monthly an unused fee of 0.625% per annum for the undrawn balance of its line of credit.
JGW V
 
1,735

 
37,520

$75.0 million variable funding note facility with interest payable monthly (7.00% as of September 30, 2017). The commitment period ends on September 24, 2019 and is collateralized by JGW VIII, LLC's ("JGW VIII") structured settlements and annuity receivables. JGW VIII is charged monthly an unused fee of 1.00% per annum for the undrawn balance of its line of credit.(1)
JGW VIII
 
—

 
—

Total VIE borrowings under revolving credit facilities and other similar borrowings
 
 
$
1,735

 
$
56,432

(1) As a result of adopting ASU 2015-03 & ASU 2015-15, debt issuance costs related to a recognized debt liability are deducted from the carrying amount of that debt liability or shown as an asset in instances where revolving credit facilities have been temporarily paid down at period end.
As of September 30, 2017, the JGW VIII facility had no outstanding borrowings. The unamortized portion of the debt issuance costs in connection with the JGW VIII borrowing facility was $1.0 million, which was included within other assets on the Company's condensed consolidated balance sheets as of September 30, 2017.
Interest expense, including unused fees, for the three months ended September 30, 2017 and 2016 related to VIE borrowings under revolving credit facilities and other borrowings was $1.7 million and $1.4 million, respectively. Interest expense, including unused fees, for the nine months ended September 30, 2017 and 2016 related to VIE borrowings under revolving credit facilities and other similar borrowings was $5.0 million and $6.6 million, respectively.
In January 2016, the Company terminated a $50.0 million credit facility which had no outstanding balance as of December 31, 2015. The facility had an original maturity date of October 2, 2016 and was collateralized by JGW IV, LLC's structured settlement and annuity receivables. Interest was payable monthly at the rate of LIBOR plus an applicable margin and there was an unused fee of 0.50% per annum for the undrawn balance of this line of credit. No fees were paid to terminate this facility. The Company expensed $0.5 million of unamortized debt issuance costs during the nine months ended September 30, 2016 in connection with the termination of this credit facility, which was included in interest expense in the Company's condensed consolidated statements of operations.
In May 2016, the Company terminated its $100.0 million credit facility for JGW VII. The facility had an original maturity date of November 15, 2016 and was collateralized by JGW VII, LLC's structured settlement, annuity and lottery receivables. The Company expensed $1.1 million of unamortized debt issuance costs during the nine months ended September 30, 2016 in connection with the termination of this credit facility, which was included in interest expense in the Company's condensed consolidated statements of operations.
In May 2016, the Company modified the terms of its $300.0 million multi-tranche and lender credit facility, extending the commitment termination date from July 24, 2016 to July 24, 2017 and changing the facility termination date to November 30, 2017. As part of the modification, the base interest rate on each tranche was increased by 0.30%. The Company incurred $1.5 million in debt issuance costs in connection with the modification which will be amortized over the life of the facility and included in interest expense in the Company's condensed consolidated statements of operations.

32
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


In May 2016, the commitment period of the $100.0 million credit facility of JGW-S III, LLC was modified to end on May 19, 2018 followed by an 18 month amortization period. The facility originally had a 2-year revolving period upon notice by the issuer or the note holder with all principal and interest outstanding payable no later than October 15, 2048.
The weighted average interest rate on outstanding VIE borrowings under revolving credit facilities and other similar borrowings as of September 30, 2017 and December 31, 2016 was 4.96% and 5.00%, respectively.
11. Other Borrowings Under Revolving Credit Facilities and Other Similar Borrowings
The Company had the following lines of credit with various financial institutions, which primarily are used for the funding of mortgage loans held for sale, as of:
 
 
September 30, 2017
 
December 31, 2016
 
 
(In thousands)
$95.0 million warehouse line of credit maturing on February 9, 2018 with an interest rate of LIBOR plus 2.35%, subject to a floor of 2.50% (3.58% as of September 30, 2017 and 3.07% as of December 31, 2016) and a non-usage fee of 0.25%.
 
$
67,509

 
$
65,565

$100.0 million warehouse line of credit maturing on August 15, 2018 with an interest rate of LIBOR plus 2.15%, subject to a floor of 2.40% (3.38% as of September 30, 2017 and 2.97% as of December 31, 2016). The facility does not incur a non-usage fee.
 
70,278

 
39,140

$95.0 million warehouse line of credit maturing on November 15, 2018 with an interest rate of LIBOR plus 2.60%, subject to a floor of 3.10% (3.83% as of September 30, 2017 and 3.32% as of December 31, 2016) and a non-usage fee of 0.25%.
 
89,215

 
39,347

$25.0 million warehouse line of credit with an interest rate of LIBOR plus 2.15%, subject to a floor of 2.50% (2.87% as of December 31, 2016) and a non-usage fee of 0.25%. The facility matured on February 5, 2017.
 
—

 
13,057

$100.0 million warehouse line of credit with an interest rate of LIBOR plus 2.25% (2.97% as of December 31, 2016). The facility did not incur a non-usage fee. The facility was terminated in March 2017.
 
—

 
68,479

$10.0 million operating line of credit maturing August 15, 2018 with an interest rate of Prime plus 0.50%, subject to a floor of 5.00% (5.00% as of September 30, 2017 and December 31, 2016) and a non-usage fee of 0.50%.
 
4,000

 
4,000

Total other borrowings under revolving credit facilities and other similar borrowings
 
$
231,002

 
$
229,588

In August 2016, the Company increased the capacity of its $6.0 million operating line of credit to $10.0 million. The Company may only draw on a balance of $4.0 million until regulatory approval is obtained, which is not expected prior to the current maturity date.
In August 2017, the Company terminated its $50.0 million warehouse line of credit that was scheduled to mature on May 11, 2018.
In October 2017, the Company increased the capacity of its $100.0 million warehouse line of credit to $150.0 million, and all other terms remain unchanged.
On January 11, 2018, the capacity of the $95.0 million warehouse line of credit will revert to $70.0 million through its maturity date of November 15, 2018, and all other terms remain unchanged.
Interest expense, including unused fees, for the three months ended September 30, 2017 and 2016 related to other borrowings under revolving credit facilities and other similar borrowings was $2.3 million and $1.7 million, respectively. Interest expense, including non-usage fees, for the nine months ended September 30, 2017 and 2016 related to other borrowings under revolving credit facilities and other similar borrowings was $5.3 million and $4.0 million, respectively.
The weighted average interest rate on outstanding other borrowings under revolving credit facilities and other similar borrowings as of September 30, 2017 and December 31, 2016 was 3.65% and 2.86%, respectively.
As of September 30, 2017, the Company had pledged mortgage loans held for sale as collateral under the above warehouse lines of credit. The above agreements also contain covenants which include certain financial requirements, including maintenance

33
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


of maximum adjusted leverage ratio, minimum net worth, minimum tangible net worth, minimum liquidity, minimum current ratio, minimum unencumbered cash, positive net income, and limitations on additional indebtedness and sale of assets, as defined in the agreements. The Company was in compliance with its debt covenants as of September 30, 2017. Additionally, as of September 30, 2017, the Company had pledged MSRs as collateral under its operating line of credit.
12. VIE Long-Term Debt 
The debt issued by the Company's special purpose entities ("SPEs") is recourse only to the respective entities that issued the debt and is non-recourse to the Company and its other subsidiaries. Certain subsidiaries of the Company continue to receive fees for servicing the securitized assets which are eliminated upon consolidation. In addition, the risk to the Company's non-SPE subsidiaries from SPE losses is limited to cash reserves, residual interest amounts and the repurchase of structured settlement payment streams that are subsequently determined to be ineligible for inclusion in the securitization or permanent financing trusts. The VIE long-term debt consisted of the following as of:
 
September 30, 2017
 
December 31, 2016
 
(In thousands)
PLMT Permanent Facility
$
35,092

 
$
37,630

Long-Term Pre-settlement Facility
5,118

 
5,427

2012-A Facility
581

 
708

LCSS Facility (2010-C)
11,636

 
12,015

LCSS Facility (2010-D)
7,159

 
7,159

Total VIE long-term debt
$
59,586

 
$
62,939

PLMT Permanent Facility
The Company has a $75.0 million floating rate asset-backed loan with interest payable monthly at one-month LIBOR plus 1.25% which is currently in a runoff mode with the outstanding balance being reduced by periodic cash collections on the underlying lottery receivables. The interest rate on this loan was 2.49% and 1.87% at September 30, 2017 and December 31, 2016, respectively. The loan matures on October 30, 2040.
The debt agreement with the counterparty requires Peachtree Lottery Master Trust ("PLMT") to hedge the notional amount of the debt with a pay fixed and receive variable interest rate swap with the counterparty. The swaps are included within VIE derivative liabilities, at fair value, on the Company's condensed consolidated balance sheets.
Long-Term Pre-settlement Facility
In 2011, the Company issued three fixed rate notes totaling $45.1 million collateralized by pre-settlement funding transactions, of which $5.1 million and $5.4 million principal amount remained outstanding as of September 30, 2017 and December 31, 2016, respectively. In June 2016, the maturity date of each of the notes was extended until the sale of the collateral, at which point the proceeds will be distributed to the holders of the notes in full satisfaction of the Company's debt obligations. To the extent that there are sufficient cash receipts from collateralized pre-settlement funding transactions to pay for interest and principal due on the notes, interest expense will be recognized monthly on the notes at a rate of 9.25% per annum.
2012-A Facility
In December 2012, the Company issued a series of notes collateralized by structured settlements. The proceeds to the Company from the issuance of the notes were $2.5 million and interest accrues on the notes at a fixed interest rate of 9.25% per annum. Interest and principal are payable monthly from cash receipts of collateralized structured settlement receivables. The notes mature on June 15, 2024.
Long-Term Debt for Life Contingent Structured Settlements (2010-C & 2010-D)
Long-Term Debt (2010-C)
In November 2010, the Company issued a private asset class securitization note ("2010-C") registered under Rule 144A under the Securities Act ("Rule 144A"). The 2010-C bond issuance of $12.9 million is collateralized by life contingent structured settlements. 2010-C accrues interest at 10% per annum and matures on March 15, 2039.
The interest and, if available, principal payments are payable monthly from cash receipts of collateralized life contingent structured settlements receivables.

34
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


Long-Term Debt (2010-D)
In December 2010, the Company paid $0.2 million to purchase the membership interests of LCSS, LLC from JLL Partners, Inc., a related party. LCSS, LLC owns 100% of the membership interests of LCSS III, LLC, which owns 100% of the membership interests of LCSS II, LLC ("LCSS II"). In November 2010, LCSS II issued $7.2 million of long-term debt ("2010-D") collateralized by life contingent structured settlements. 2010-D accrues interest at 10% per annum and matures on July 15, 2040.
The interest and, if available, principal payments are payable monthly from cash receipts of collateralized life contingent structured settlements receivables.
Interest expense for the three months ended September 30, 2017 and 2016 related to VIE long-term debt was $1.6 million and $7.3 million, respectively. Interest expense for the nine months ended September 30, 2017 and 2016 related to VIE long-term debt was $4.7 million and $15.9 million, respectively.
13. VIE Long-Term Debt Issued by Securitization and Permanent Financing Trusts, at Fair Value 
Securitization Debt
The Company elected the fair value option under ASC 825 to measure the securitization issuer debt and related finance receivables. The Company has determined that measurement of the securitization debt issued by SPEs at fair value better correlates with the value of the finance receivables held by SPEs, which are held to provide the cash flows for the note obligations. The debt issued by the Company's SPEs is recourse only to the respective entities that issued the debt and is non-recourse to the Company and its other subsidiaries. Certain subsidiaries of the Company continue to receive fees for servicing the securitized assets which are eliminated upon consolidation. In addition, the risk to the Company's non-SPE subsidiaries from SPE losses is limited to cash reserves, residual interest amounts and the repurchase of structured settlement payment streams that are subsequently determined to be ineligible for inclusion in the securitization or permanent financing trusts.
During the nine months ended September 30, 2017, the Company completed the pre-funding associated with the 2016-1 securitization, the initial close and pre-funding associated with the 2017-1 securitization transaction and the initial close and pre-funding associated with the 2017-2 securitization transaction which were registered under Rule 144A. The following table summarizes these securitization transactions:
 
2017-2
 
2017-1
 
2016-1
 
(Bonds issued in millions)
Issue date
8/9/2017
 
3/22/2017
 
10/26/2016
Bonds issued
$144.2
 
$131.8
 
$117.3
Receivables securitized
2,201
 
2,129
 
1,943
Deal discount rate
3.95%
 
4.35%
 
3.89%
Retained interest %
5.50%
 
5.50%
 
5.50%
Class allocation (Moody's)
 
 
 
 
0
Aaa
84.25%
 
84.75%
 
84.00%
Baa2
10.25%
 
9.75%
 
10.50%
During the nine months ended September 30, 2016, the Company did not complete any asset securitization transactions that were registered under Rule 144A.

35
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


The following table summarizes notes issued by securitization trusts and permanent financing trusts for which the Company has elected the fair value option and which are recorded as VIE long-term debt issued by securitization and permanent financing trusts, at fair value, on the Company's condensed consolidated balance sheets: 
 
September 30, 2017
 
December 31, 2016
 
Outstanding Principal
 
Fair Value
 
Outstanding Principal
 
Fair Value
 
(In thousands)
Securitization trusts
$
3,505,757

 
$
3,716,941

 
$
3,460,820

 
$
3,550,503

Permanent financing VIEs
431,833

 
483,883

 
445,339

 
463,947

Total VIE long-term debt issued by securitization and permanent financing trusts, at fair value
$
3,937,590

 
$
4,200,824

 
$
3,906,159

 
$
4,014,450

Interest expense for the three months ended September 30, 2017 and 2016 related to VIE long-term debt issued by securitization trusts and permanent financing facilities, at fair value, was $41.9 million and $33.9 million, respectively. Interest expense for the nine months ended September 30, 2017 and 2016 related to VIE long-term debt issued by securitization trusts and permanent financing facilities, at fair value, was $128.5 million and $110.6 million, respectively.
In connection with the refinancing of the Residual Term Facility, which was completed on September 2, 2016, the Company issued $207.5 million in notes collateralized by the residual asset cash flows and reserve cash associated with 36 of the Company's securitizations with outstanding principal balances. Proceeds from the issuance of the notes were used, in part, to repay the $131.4 million outstanding principal balance on the Residual Term Facility.
In March 2017, the Company issued $2.3 million in notes collateralized by the residual asset cash flows and reserve cash associated with one of the Company's securitizations with an outstanding principal balance. The Company incurred $0.2 million of debt issuance costs which were included in debt issuance expense in the Company's condensed consolidated statements of operations. Principal and interest are paid monthly from the cash flows from the collateralized residual interests.
14. Derivative Financial Instruments
Interest Rate Swaps
The Company utilizes interest rate swaps to manage its exposure to changes in interest rates related to borrowings on its revolving credit facilities and other similar borrowings. Hedge accounting has not been applied to any of the Company's interest rate swaps. 
As of September 30, 2017 and December 31, 2016, the Company did not have any outstanding interest rate swaps related to its borrowings on revolving credit facilities. During the three months ended September 30, 2017, and 2016, the Company did not terminate any interest rate swaps. During the nine months ended September 30, 2017 and 2016, and in connection with its securitizations and direct asset sales, the Company terminated interest rate swaps with notional values of $21.8 million and $75.2 million, respectively. The total gain (loss) on the termination of interest rate swaps for the nine months ended September 30, 2017 and 2016 was $0.2 million and $(1.5) million, respectively. There was no unrealized loss for interest rate swaps for the three and nine months ended September 30, 2017 and 2016. The realized and unrealized gains (losses) associated with these interest rate swaps were recorded in realized and unrealized gains (losses) on VIE and other finance receivables, long-term debt and derivatives in the Company's condensed consolidated statements of operations.
The Company also has interest rate swaps to manage its exposure to changes in interest rates related to its VIE long-term debt issued by securitization and permanent financing trusts. As of September 30, 2017 and December 31, 2016, the Company had eight outstanding swaps, as of both periods, for its VIE long-term debt with a total notional amount of $132.5 million and $156.6 million, respectively. The Company pays fixed rates ranging from 4.50% to 5.77% and receives floating rates equal to one-month LIBOR plus an applicable margin.
These interest rate swaps were designed to closely match the borrowings under the respective floating rate asset-backed loans in amortization. As of September 30, 2017, the terms of these interest rate swaps range from approximately 4.8 to 18.3 years. For the three months ended September 30, 2017 and 2016, the amount of unrealized gain recognized was $1.1 million and $2.5 million, respectively. For the nine months ended September 30, 2017 and 2016, the amount of unrealized gain (loss) recognized was $3.7 million and $(0.3) million, respectively. These gains (losses) were recorded in realized and unrealized gains (losses) on VIE and other finance receivables, long-term debt and derivatives in the Company's condensed consolidated statements of operations.

36
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


Additionally, the Company has interest rate swaps to manage its exposure to changes in interest rates related to its borrowings under Peachtree Structured Settlements, LLC ("PSS"), a permanent financing VIE, and PLMT. As of September 30, 2017, the Company had 134 outstanding swaps for PSS and PLMT with a total notional amount of $170.1 million. As of December 31, 2016, the Company had 137 outstanding swaps for PSS and PLMT with a total notional amount of $181.2 million. The Company pays fixed rates ranging from 4.90% to 8.70% and receives floating rates equal to one-month LIBOR rate plus an applicable margin.
The PSS and PLMT interest rate swaps were designed to closely match the borrowings under the respective floating rate asset-backed loans in amortization. As of September 30, 2017, the terms of the interest rate swaps for PSS and PLMT range from less than one month to approximately 16.8 years. During the three months ended September 30, 2017 and 2016, the Company did not terminate any interest rate swaps for PSS and PLMT. During the nine months ended September 30, 2017, the Company did not terminate any interest rate swaps for PSS and PLMT. During the nine months ended September 30, 2016, the Company terminated an interest rate swap for PSS with a notional value of $13.8 million and recorded a loss on the termination of $3.1 million. For the three months ended September 30, 2017 and 2016, the amount of unrealized loss recognized was $1.4 million and $2.6 million, respectively. For the nine months ended September 30, 2017 and 2016, the amount of unrealized gain (loss) recognized was $3.4 million and $(2.7) million, respectively. These gains (losses) were recorded in realized and unrealized gains (losses) on VIE and other finance receivables, long-term debt and derivatives in the Company's condensed consolidated statements of operations.
The notional amounts and fair values of interest rate swaps were as follows as of:
 
 
 
 
September 30, 2017
 
December 31, 2016
Entity
 
Securitization
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
 
 
 
 
(In thousands)
321 Henderson I, LLC
 
2004-A A-1
 
$
16,210

 
$
(1,181
)
 
$
20,265

 
$
(1,610
)
321 Henderson I, LLC
 
2005-1 A-1
 
33,297

 
(3,554
)
 
39,548

 
(4,495
)
321 Henderson II, LLC
 
2006-1 A-1
 
6,347

 
(509
)
 
7,969

 
(714
)
321 Henderson II, LLC
 
2006-2 A-1
 
10,135

 
(1,335
)
 
12,011

 
(1,654
)
321 Henderson II, LLC
 
2006-3 A-1
 
8,851

 
(1,115
)
 
11,832

 
(1,394
)
321 Henderson II, LLC
 
2006-4 A-1
 
9,632

 
(661
)
 
12,378

 
(965
)
321 Henderson II, LLC
 
2007-1 A-2
 
20,956

 
(3,512
)
 
22,942

 
(3,965
)
321 Henderson II, LLC
 
2007-2 A-3
 
27,076

 
(5,990
)
 
29,606

 
(6,664
)
PSS
 
—
 
129,578

 
(19,982
)
 
137,361

 
(22,190
)
PLMT
 
—
 
40,561

 
(5,655
)
 
43,792

 
(6,781
)
Total
 
 
 
$
302,643

 
$
(43,494
)
 
$
337,704

 
$
(50,432
)
Interest Rate Lock Commitments and Forward Sale Commitments
The Company enters into IRLCs to originate residential mortgage loans held for sale, at specified interest rates and within a specified period of time (generally between 30 and 90 days), with customers who have applied for a loan and meet certain credit and underwriting criteria. These IRLCs meet the definition of a derivative and are reflected in other assets or other liabilities on the Company's condensed consolidated balance sheets at fair value with changes in fair value recognized in the realized and unrealized gains on sale of mortgage loans held for sale, net of direct costs, in the Company's condensed consolidated statements of operations. The fair value of the IRLCs are measured based on the value of the underlying mortgage loan, quoted GSE MBS prices, estimates of the fair value of the MSRs and the pull-through rate, net of commission expense and broker fees.
The Company manages the interest rate price risk associated with its outstanding IRLCs and mortgage loans held for sale by entering into derivative loan instruments such as forward sale commitments and mandatory delivery commitments. Management expects these derivatives will experience changes in fair value opposite to changes in the fair value of the derivative loan commitments and mortgage loans held for sale, thereby reducing earnings volatility. The Company takes into account various factors and strategies in determining the portion of the mortgage pipeline (IRLCs) and mortgage loans held for sale it wants to economically hedge.

37
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


The notional amounts and fair values associated with IRLCs and forward sale commitments were as follows as of:
 
 
September 30, 2017
 
December 31, 2016
 
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
 
 
(In thousands)
Derivative Assets:
 
 
 
 
 
 
 
 
Interest rate lock commitments
 
$
767,540

 
$
16,268

 
$
355,870

 
$
6,072

Forward sale commitments
 
650,000

 
1,848

 
406,000

 
659

Total
 
$
1,417,540

 
$
18,116

 
$
761,870

 
$
6,731

The Company has exposure to credit loss in the event of contractual non-performance by its trading counterparties in derivative financial instruments that the Company uses in its interest rate risk management activities. The Company manages this credit risk by selecting only counterparties that the Company believes to be financially strong, by spreading the risk among multiple counterparties, by placing contractual limits on the amount of unsecured credit extended to any single counterparty and by entering into netting agreements with counterparties, as appropriate.
15. Income Taxes
The Corporation is required to file federal and applicable state corporate income tax returns and recognizes income taxes on its pre-tax income, which historically has consisted primarily of its share of JGW LLC's pre-tax income. JGW LLC is organized as a limited liability company which is treated as a "flow-through" entity for income tax purposes and therefore is not subject to income taxes. As a result, the Company's condensed consolidated financial statements do not reflect a benefit or provision for income taxes on the pre-tax income or loss attributable to the non-controlling interests in JGW LLC.
The Company's overall effective tax rate was (8.2)% for the nine months ended September 30, 2017, as compared to an overall effective rate of 14.7% for the nine months ended September 30, 2016. The effective tax rate for the Corporation for the nine months ended September 30, 2017 and 2016 was (14.8)% and 26.5%, respectively. The effective tax rate for JGW LLC for the nine months ended September 30, 2017 and 2016 was (0.2)% and 0.6%, respectively.
The change in the Company's effective tax rate was primarily the result of: (i) the differences in the projected book and taxable income for the respective years as of the balance sheet dates; (ii) the impact of permanent differences between book and taxable income; (iii) a share of the Company's pre-tax book income (loss) being attributable to separate subsidiary entities that are taxed as corporations, of which most record a full valuation allowance; (iv) the recording of a valuation allowance in the three months ended September 30, 2016 due to the expectation that some of the deferred tax assets are not more likely than not to be realized due to the insufficient future reversals of existing taxable temporary differences; and (v) a state limitation on the utilization of net operating losses expected to be generated during the current year that are not more likely than not to be realized. The difference in effective tax rates between the two legal entities arises because JGW LLC is treated as a "flow-through" entity for income tax purposes and therefore is not subject to corporate-level income taxes.

38
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


16. Stockholders' Equity
On November 14, 2013, the Corporation consummated an initial public offering ("IPO") and amended and restated its certificate of incorporation to provide for, among other things, the authorization of 500,000,000 shares of Class A common stock (the "Class A common stock"), par value $0.00001 per share, 500,000,000 shares of Class B common stock (the "Class B common stock"), par value $0.00001 per share, 500,000,000 shares of Class C "non-voting" common stock, par value $0.00001 per share (the "Class C common stock") and 100,000,000 shares of blank check preferred stock. Also, concurrent with the consummation of the Corporation's IPO, JGW LLC merged with and into a newly formed subsidiary of the Corporation.
As of September 30, 2017, there were 16,352,775 shares of Class A common stock issued and 15,810,703 shares outstanding. Additionally, there were 8,629,738 shares of Class B common stock issued and outstanding as of September 30, 2017. There were no shares of Class C common stock issued or outstanding as of September 30, 2017.
Class A Common Stock
Holders of Class A common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of Class A common stock are entitled to share ratably (based on the number of shares of Class A common stock held) if and when any dividend is declared by the Board of Directors. Upon dissolution, liquidation or winding up, holders of Class A common stock are entitled to a pro rata distribution of any assets available for distribution to common stockholders, and do not have preemptive, subscription, redemption, or conversion rights.
Class B Common Stock
Shares of Class B common stock will only be issued in the future to the extent that additional common membership interests in JGW LLC (the "Common Interests", and the holders of such Common Interests, the "Common Interestholders") are issued by JGW LLC, in which case the Company would issue a corresponding number of shares of Class B common stock.
Holders of Class B common stock are entitled to ten votes for each share held of record on all matters submitted to a vote of stockholders. Holders of Class B common stock do not have any right to receive dividends and upon liquidation, dissolution or winding up and will only be entitled to receive an amount per share equal to the $0.00001 par value. Holders of Class B common stock do not have preemptive rights to purchase additional shares of Class B common stock.
Subject to the terms and conditions of the operating agreement of JGW LLC, each Common Interestholder has the right to exchange their Common Interests in JGW LLC, together with the corresponding number of shares of Class B common stock, for shares of Class A common stock or, at the option of JGW LLC, cash equal to the market value of one share of Class A common stock.
Class C Common Stock
Holders of Class C common stock are generally not entitled to vote on any matters. Holders of Class C common stock are entitled to share ratably (based on the number of shares of Class C common stock held) if and when any dividend is declared by the Board of Directors. Upon dissolution, liquidation or winding up, holders of Class C common stock will be entitled to a pro rata distribution of any assets available for distribution to common stockholders (except the de minimis par value of the Class B common stock), and do not have preemptive rights to purchase additional shares of Class C common stock.
Subject to the terms and conditions of the operating agreement of JGW LLC, Peach Group Holdings, Inc. ("PGHI Corp.") and its permitted transferees have the right to exchange the non-voting Common Interests in JGW LLC they hold for shares of Class C common stock or, at the option of JGW LLC, cash equal to the market value of Class C common stock.
Each share of Class C common stock may, at the option of the holder, be converted at any time into a share of Class A common stock on a one-for-one basis.
Preferred Stock
The Company's certificate of incorporation provides that the Board of Directors has the authority, without action by the stockholders, to designate and issue up to 100,000,000 shares of preferred stock in one or more classes or series and to fix the powers, rights, preferences, and privileges of each class or series of preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, and the number of shares constituting any class or series, which may be greater than the rights of the holders of the common stock. No preferred stock had been issued or was outstanding as of September 30, 2017 and December 31, 2016.

39
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


Warrants Issued to PGHI Corp.
In connection with the IPO and the related restructuring, the Class C Profits Interests of JGW LLC held by PGHI Corp. were canceled and holders received in exchange warrants to purchase shares of Class A common stock. The warrants issued in respect of the Tranche C-1 Profits Interests of JGW LLC entitle the holders thereof to purchase up to 483,217 shares of Class A common stock and have an exercise price of $35.78 per share. The warrants issued in respect of the Tranche C-2 Profits Interests of JGW LLC also entitle the holders thereof to purchase up to 483,217 shares of Class A common stock and have an exercise price of $63.01 per share. All of the warrants issued are currently exercisable, terminate on January 8, 2022, and may not be transferred. No warrants were exercised during the nine months ended September 30, 2017 or 2016.
JGW LLC Operating Agreement
Pursuant to the operating agreement of JGW LLC, the holders of JGW LLC Common Interests (other than the Company) have the right, subject to terms of the operating agreement as described therein, to exchange their Common Interests and an equal number of shares of Class B common stock for an equivalent number of shares of Class A common stock, or in the case of PGHI Corp., an equivalent number of shares of Class C common stock. During the nine months ended September 30, 2017 and 2016, 70,549 and 195,445 Common Interests in JGW LLC, in addition to an equal number of shares of Class B common stock, were exchanged for 70,549 and 195,445 shares of the Class A common stock pursuant to the operating agreement, respectively.
17. Non-Controlling Interests
The Corporation consolidates the financial results of JGW LLC whereby it records a non-controlling interest for the economic interest in JGW LLC held by the Common Interestholders. Pursuant to an agreement between the Corporation and JGW LLC, any time the Corporation cancels, issues or repurchases shares of Class A common stock, JGW LLC cancels, issues or repurchases, as applicable, an equivalent number of Common Interests. In addition, any time Common Interestholders exchange their Common Interests for shares of Class A common stock, JGW LLC is required to transfer an equal number of Common Interests to the Corporation. Changes in the non-controlling and the Corporation's interest in JGW LLC for the nine months ended September 30, 2017 are presented in the following table:
 
Total Common Interests Held By:
 
The J.G. Wentworth
Company
 
Non-controlling
Interests
 
Total
 
Balance as of December 31, 2016
15,730,473

 
13,070,781

 
28,801,254

Common Interests acquired by The J.G. Wentworth Company as a result of the exchange of units for shares of Class A common stock
70,549

 
(70,549
)
 
—

Issuance of Class A common stock for vested equity awards
9,681

 
—

 
9,681

Common Interests forfeited
—

 
(9,871
)
 
(9,871
)
Balance as of September 30, 2017
15,810,703

 
12,990,361

 
28,801,064

The non-controlling interests include the Common Interestholders who were issued shares of Class B common stock in connection with the IPO as well as other Common Interestholders who may convert their Common Interests into 4,360,623 shares of Class C common stock.

40
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


18. Commitments and Contingencies
Arrangements
The Company had an arrangement (the "Arrangement") with a counterparty for the sale of LCSS assets that met certain eligibility criteria, which expired on June 30, 2012. Pursuant to the Arrangement, the Company also has a borrowing agreement (the "Borrowing Agreement") with the counterparty that gave the counterparty a borrowing base to draw on from the Company for the purchase of LCSS assets. As of September 30, 2017 and December 31, 2016, the amount owed from the counterparty pursuant to this Borrowing Agreement is $11.2 million and $10.8 million, respectively, is earning interest at an annual rate of 5.35% and is included in Other receivables, net of allowance for losses, on the Company's condensed consolidated balance sheets.
The Arrangement also has put options, which expire on December 30, 2019 and 2020, that give the counterparty the option to sell, on those dates, purchased LCSS assets back to the Company if the underlying claimant is still alive on that date. The put options, if exercised by the counterparty, require the Company to purchase LCSS assets at a target internal rate of return ("IRR") of 3.5% above the original target IRR paid by the counterparty.
Tax Receivable Agreement
Common Interestholders may exchange their Common Interests for shares of Class A common stock, or, in the case of PGHI Corp., shares of Class C common stock, on a one-for-one basis or, in each case, at the option of JGW LLC, cash. For income tax purposes, such exchanges are treated as sales of Common Interests in JGW LLC to the Corporation. JGW LLC made an election under Section 754 of the Internal Revenue Code of 1986 in connection with the filing of its 2014 federal income tax return which, upon each exchange, effectively treats the Corporation as having purchased an undivided interest in each of the assets owned by JGW LLC. As such, each exchange may result in increases (or decreases) in the Corporation's tax basis in the tangible and intangible assets of JGW LLC that otherwise would not have been available. Any such increases (decreases) in tax basis are, in turn, anticipated to create incremental tax deductions (income) that would reduce (increase) the amount of income tax the Corporation would otherwise be required to pay in the future.
In connection with the IPO, the Corporation entered into a tax receivable agreement ("TRA") with Common Interestholders who held in excess of approximately 1% of the Common Interests outstanding immediately prior to the IPO. The TRA requires the Company to pay those Common Interestholders 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that the Company actually realizes in any tax year from increases in tax basis realized as a result of any future exchanges by Common Interestholders of their Common Interests for shares of Class A or Class C common stock (or cash). The cash savings in income tax paid to any such Common Interestholders will reduce the cash that may otherwise be available to the Corporation for operations and to make future distributions to holders of Class A common stock.
For purposes of the TRA, cash savings in income tax will be computed by comparing the Corporation's actual income tax liability for a covered tax year to the amount of such taxes that the Corporation would have been required to pay for such covered tax year had there been no increase to the Corporation's share of the tax basis of the tangible and intangible assets of JGW LLC as a result of such sale and any such exchanges and had the Corporation not entered into the TRA. The TRA continues until all such tax benefits have been utilized or expired, unless the Corporation exercises its right to terminate the TRA upon a change of control for an amount based on the remaining payments expected to be made under the TRA.
The exchange of Common Interests for shares of Class A common stock in 2015 and 2014 resulted in a $53.3 million and $207.0 million increase, respectively, in the Corporation's share of the tax basis of JGW LLC's assets, which created current and future income tax deductions for the Corporation. The increase in tax basis, however, did not result in an income tax cash savings for the years ended December 31, 2015 and 2014, because the Corporation would not have been a tax payer in the absence of such tax basis increase. Consequently, there is no liability associated with the 2015 or 2014 exchanges pursuant to the TRA. The Corporation will compute any tax liability for similar exchanges for 2016 and 2017 in conjunction with the preparation of its 2016 and 2017 Federal tax returns. The Corporation, however, does not expect to have any tax liability associated with the 2016 and 2017 tax years and does not expect to benefit from income tax cash savings related to basis adjustments associated with the 2016 and 2017 exchanges pursuant to the TRA, or have any liability in connection with exchanges pursuant to the TRA made in 2016 and 2017.
Loss on Contingencies
In the normal course of business, the Company is subject to various legal proceedings and claims. These proceedings and claims have not been finally resolved and the Company cannot make any assurances as to their ultimate disposition. It is management's opinion, based on the information currently available at this time, that the expected outcome of these matters will not have a material adverse effect on the financial position, the results of operations, or cash flows of the Company.

41
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


Commitments to Extend Credit
The Company enters into IRLCs with customers who have applied for residential mortgage loans and meet certain credit and underwriting criteria. These commitments expose the Company to market risk if interest rates change and the loan is not economically hedged or committed to an investor. The Company is also exposed to credit loss if the loan is originated and not sold to an investor and the mortgagor does not perform. The collateral upon extension of credit typically consists of a first deed of trust in the mortgagor's residential property. Commitments to originate loans do not necessarily reflect future cash requirements as some commitments are expected to expire without being drawn upon. Total commitments to originate loans as of September 30, 2017 and December 31, 2016 approximated $767.5 million and $355.9 million, respectively.
19. Share-based Compensation 
Under the Company's 2013 Omnibus Incentive Plan (the "Plan"), stock options, restricted stock, restricted stock units and stock appreciation rights units may be granted to officers, employees, non-employee directors and consultants of the Company. As of September 30, 2017, 1.1 million shares of unissued Class A common stock were available to grant under the Plan.
During the nine months ended September 30, 2017, the Company granted non-qualified stock options and performance-based restricted stock units to its employees. The Company recognizes compensation cost, net of a forfeiture rate, in compensation and benefits expense in the Company's condensed consolidated statements of operations only for those awards that are expected to vest. The forfeiture rate is estimated based on historical experience taking into account its expectations about future forfeitures.
Stock Options
The Company has granted options to purchase Class A common stock. These stock options have exercise prices equal to the fair value of the Class A common stock on the date of grant, a contractual term of ten years and vest generally in equal annual installments over a five-year period following the date of grant, subject to the holder's continued employment with the Company through the applicable vesting date.
The fair value of stock option awards granted during the nine months ended September 30, 2017 was estimated using the Black-Scholes valuation model and included the following assumptions:
 
 
Nine Months Ended September 30, 2017
Fair value
 
$
0.19

Risk-free interest rate
 
2.07
%
Expected volatility
 
43.58
%
Expected life of options in years
 
6.5

Expected dividend yield
 
—

The Company recognizes compensation expense for the fair value of the stock options on a straight-line basis over the requisite service period of the awards. During the nine months ended September 30, 2017 and 2016, the Company recognized $0.9 million and $0.8 million of share-based compensation expense, respectively, in connection with the stock options issued under the Plan.
A summary of stock option activity for the nine months ended September 30, 2017 is as follows:
 
Shares
 
Weighted -
Average
Exercise Price
 
Weighted - Average
Remaining 
Contractual
Term (in years)
 
Aggregate 
Intrinsic 
Value
(Dollars in Millions)
Outstanding as of December 31, 2016
1,376,549

 
$
5.77

 
7.73
 
$
—

Granted
206,500

 
0.41

 
 
 
 

Forfeited
(74,117
)
 
1.11

 
 
 
 

Expired
(8,472
)
 
8.99

 
 
 
 
Outstanding as of September 30, 2017
1,500,460

 
$
1.68

 
7.24
 
$
—

Expected to vest as of September 30, 2017
1,448,184

 
1.73

 
7.23
 
—

Vested as of September 30, 2017
143,633

 
8.74

 
7.20
 
—


42
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


During the nine months ended September 30, 2017 and 2016, stock options representing the right to acquire 73,400 and 135,050 shares, respectively, vested with an aggregate grant date fair value of $0.2 million and $0.7 million, respectively.
The aggregate intrinsic value represents the total pre-tax value of the difference between the closing price of Class A common stock on the last trading day of the period and the exercise price of the options, multiplied by the number of in-the-money stock options that would have been received by the option holders had all the option holders exercised their options on September 30, 2017. The intrinsic value of the Company's stock options changes based on the closing price of the Company's stock. As of September 30, 2017, $2.3 million of total unrecognized compensation expense related to the outstanding stock options is expected to be recognized over a weighted average period of 2.0 years.
In April 2016, the Board authorized a one-time stock modification program for 1,266,125 outstanding options that were issued prior to January 1, 2016 and held by 45 participants. The stock modification program was approved by shareholders at the Annual Meeting on June 2, 2016. On July 29, 2016, the Tender Offer and Consent Solicitation Statement was sent to 33 eligible employees, who were employed as of that date by the Company, who were given 20 business days to consent to the modification. On August 26, 2016, the solicitation period expired with 32 employees electing to participate for an aggregate of 1,195,927 shares to be modified.
Pursuant to the approved stock modification program, on August 29, 2016, the exercise price of the outstanding options to purchase an aggregate of 147,963 shares of Class A common stock by all persons, other than a key executive officer of the Company as described in detail below, was modified to $0.32 per share, which was the closing price per share of the Class A common stock on the OTCQX Market on August 29, 2016. In addition, the vesting date of such modified options was changed to August 29, 2019.
Also on August 29, 2016, options to purchase 180,000 shares of Class A common stock held by the key executive officer were canceled and the Company simultaneously granted new stock options to purchase 180,000 shares of Class A common stock to a key executive officer, at an exercise price equal to $0.32 per share, with an expiration date of August 29, 2029. On the same date, the exercise price of outstanding options held by a key executive officer to purchase an aggregate of 180,000 shares of Class A common stock was modified to $0.32 per share and the vesting date was changed to August 29, 2019.
Pursuant to the approved stock modification program, on August 29, 2017, the exercise price of outstanding options to purchase an aggregate of 486,953 shares of Class A common stock by all persons was modified to $0.17 per share, which was the closing price per share of the Class A common stock on the OTCQX Market on August 29, 2017. In addition, the vesting date of such modified options was changed to August 29, 2019.
Except with respect to the modified exercise price and expiration date, the modified options remain subject to all terms and conditions of their original grant agreements, including termination provisions. As provided in the Tender Offer and Consent Solicitation Statement, the remainder of the options with respect to which elections were properly tendered and not withdrawn prior to the expiration of the solicitation period will be modified on one or more future modification dates (to the extent not then exercised, expired or terminated), if the closing price of our Class A common stock on each such future modification date is less than the original exercise price of such options. There are options to purchase a maximum of 180,000 shares of Class A common stock potentially subject to modification on August 29, 2018.
The valuation of the options that were modified on August 29, 2017 and 2016 is based on the following terms:
 
 
Nine Months Ended September 30, 2017
 
Nine Months Ended September 30, 2016
Fair value
 
$0.06 - $0.07

 
$0.13 - $0.15

Risk-free interest rate
 
1.58% - 1.67%

 
1.19% - 1.37%

Expected volatility
 
43.31% - 44.73%

 
43.81% - 44.52%

Expected life of options in years
 
4.1 - 6.5

 
5.1 - 6.5

Expected dividend yield
 
—

 
—

For the three and nine months ended September 30, 2017, the stock option modification resulted in an incremental compensation cost of less than $0.1 million which will be recognized over the 2-year vesting period. For the three and nine months ended September 30, 2016, the stock option modification resulted in an incremental compensation cost of less than $0.1 million which will be recognized over the 3-year vesting period.

43
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


Performance-Based Restricted Stock Units
A summary of performance-based restricted stock units for the nine months ended September 30, 2017 is as follows:
 
 
Performance - Based
Restricted Stock
Units
 
Weighted - Average
Grant - Date 
Fair Value
Outstanding as of December 31, 2016
 
207,500

 
$
1.18

Granted
 
103,250

 
0.41

Vested
 
(9,681
)
 
1.23

Forfeited
 
(69,319
)
 
6.41

Outstanding as of September 30, 2017
 
231,750

 
$
1.53

Expected to vest as of September 30, 2017
 
87,000

 
0.41

Each performance-based restricted stock unit will vest into 0 to 1.5 shares of Class A common stock depending on the degree to which the performance goals are met. Compensation expense resulting from these awards is: (i) recognized ratably from the date of the grant until the date the restrictions lapse; (ii) based on the trading price of the Class A common stock on the date of grant; and (iii) based on the probability of achievement of the specific performance-based goals.
In February 2017, the Company modified the performance goals associated with the performance-based restricted stock units granted in 2015 and 2016. As of September 30, 2017, management concluded that it was (i) improbable that the modified performance goals associated with the performance-based restricted stock units granted in 2015 and 2016 would vest and (ii) probable that the performance goals associated with the performance-based restricted stock units granted in 2017 would be met and the corresponding performance-based restricted stock units would vest. During the nine months ended September 30, 2017 and 2016, the Company recognized less than $0.1 million of compensation expense in connection with the performance-based restricted stock units.
In April 2016, the Company modified the performance goals associated with the performance-based restricted stock units granted in 2014 and 2015. During the second quarter of 2016, management concluded that it was improbable that the modified performance goals associated with the performance-based units granted in 2014 and 2015 would vest and, consequently, no expense was recognized for the modified options in the nine months ended September 30, 2016. 
The aggregate grant-date fair value of the performance-based restricted stock units granted during the nine months ended September 30, 2017 was less than $0.1 million. As of September 30, 2017, there was less than $0.1 million of total unrecognized compensation cost relating to outstanding performance-based restricted stock units that is expected to be recognized over a weighted-average period of 2.25 years. As of September 30, 2017, 9,681 of the performance-based restricted stock units had vested.
Restricted Stock
Restricted stock granted to independent directors under the Plan cliff vest on the first anniversary after the grant date. The fair value of restricted stock is determined based on the trading price of the Class A common stock on the date of grant. There was no restricted stock granted during the nine months ended September 30, 2017 or 2016. As of September 30, 2017, there was no restricted stock outstanding.
The Company recognizes compensation expense for the fair value of restricted stock on a straight-line basis over the one-year cliff vesting period. During the nine months ended September 30, 2017 and 2016, the Company did not recognize any expense and recognized less than $0.1 million, respectively, of share-based compensation expense in connection with the restricted stock.

44
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


Unvested Restricted Common Interests in JGW LLC
The following table summarizes the activities of unvested Restricted Common Interests in JGW LLC for the nine months ended September 30, 2017:
 
 
Unvested Restricted Common
Interests
 
Weighted - Average
Grant - Date 
Fair Value
Outstanding as of December 31, 2016
 
9,871

 
$
9.06

Vested in period
 
—

 
—

Forfeited
 
(9,871
)
 
9.06

Outstanding as of September 30, 2017
 
—

 
$
—

Expected to vest as of September 30, 2017
 
—

 
—

As of September 30, 2017, there was no unrecognized compensation cost related to outstanding unvested Restricted Common Interests. Total share-based compensation expense recognized for the nine months ended September 30, 2017 and 2016 related to the Restricted Common Interests was less than $0.1 million.
20. Earnings per share
Basic earnings per share ("EPS") measures the performance of an entity over the reporting period. Diluted EPS measures the performance of an entity over the reporting period while giving effect to all potentially dilutive common shares that were outstanding during the period.
In accordance with ASC 260, Earnings Per Share, all outstanding unvested share-based payments that contain rights to non-forfeitable dividends and participate in the undistributed earnings with the common stockholders are considered participating securities. The shares of Class B common stock do not share in the earnings of the Company and are therefore not considered participating securities. Accordingly, basic and diluted net earnings per share of Class B common stock have not been presented.
In connection with the IPO, Class C Profits Interests of JGW LLC held by PGHI Corp. were exchanged for a total of 966,434 warrants to purchase shares of Class A common stock. For the three and nine months ended September 30, 2017 and 2016, these warrants were not included in the computation of diluted loss per common share because they were antidilutive under the treasury stock method.
During the three months ended September 30, 2017 and 2016, 1,473,111 and 1,473,893 weighted-average stock options outstanding, respectively, were not included in the computation of diluted loss per common share because they were antidilutive under the treasury stock method. During the three months ended September 30, 2017 and 2016, 231,804 and 246,651 weighted average performance-based restricted stock units, respectively, were antidilutive and, therefore, excluded from the computation of diluted loss per common share.
During the nine months ended September 30, 2017 and 2016, 1,513,082 and 1,409,328 weighted-average stock options outstanding, respectively, were not included in the computation of diluted loss per common share because they were antidilutive under the treasury stock method. During the nine months ended September 30, 2017 and 2016, 231,750 and 230,919 weighted average performance-based restricted stock units, respectively, were antidilutive and, therefore, excluded from the computation of diluted loss per common share.
The operating agreement of JGW LLC gives Common Interestholders the right (subject to the terms of the operating agreement as described therein) to exchange their Common Interests for shares of Class A common stock on a one-for-one basis at fair value, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. The Company applies the "if-converted" method to the Common Interests and vested Restricted Common Interests in JGW LLC to determine the dilutive weighted average shares of Class A common stock outstanding. The Company applies the treasury stock method to the unvested Restricted Common Interests and the "if-converted" method on the resulting number of additional Common Interests to determine the dilutive weighted average shares of Class A common stock outstanding represented by these interests.
In computing the dilutive effect that the exchange of Common Interests and Restricted Common Interests would have on EPS, the Company considered that net loss attributable to holders of Class A common stock would decrease due to the elimination of non-controlling interests (including any tax impact). Based on these calculations, the 12,990,361 and 13,047,338 weighted average Common Interests and vested Restricted Common Interests outstanding, respectively, and the 0 and 27,777 weighted average unvested Restricted Common Interests outstanding, respectively, for the three months ended September 30, 2017 and 2016, respectively, were antidilutive and excluded from the computation of diluted loss per common share. Based on these

45
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


calculations, the 13,025,283 and 13,080,674 weighted average Common Interests and vested Restricted Common Interests outstanding, respectively, and the 4,911 and 22,474 weighted average unvested Restricted Common Interests outstanding, respectively, for the nine months ended September 30, 2017 and 2016, respectively, were antidilutive and excluded from the computation of diluted loss per common share.
The following table is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations for the three and nine months ended September 30, 2017 and 2016:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(Dollars In thousands, except per share data)
Numerator:
 
 

 
 

 
 
 
 
Numerator for basic EPS - Net loss attributable to holders of The J.G. Wentworth Company Class A common stock
 
$
(2,314
)
 
$
(18,713
)
 
$
(16,526
)
 
$
(45,593
)
Effect of dilutive securities:
 
 
 
 
 
 
 
 
JGW LLC Common Interests and vested Restricted Common Interests
 
—

 
—

 
—

 
—

JGW LLC unvested Restricted Common Interests
 
—

 
—

 
—

 
—

Numerator for diluted EPS - Net loss attributable to holders of The J.G. Wentworth Company Class A common stock
 
$
(2,314
)
 
$
(18,713
)
 
$
(16,526
)
 
$
(45,593
)
Denominator:
 
 

 
 

 
 

 
 

Denominator for basic EPS - Weighted average shares of Class A common stock
 
15,810,703

 
15,663,475

 
15,772,732

 
15,633,696

Effect of dilutive securities:
 
 

 
 

 
 

 
 

Stock options
 
—

 
—

 
—

 
—

Warrants
 
—

 
—

 
—

 
—

Restricted common stock and performance-based restricted stock units
 
—

 
—

 
—

 
—

JGW LLC Common Interests and vested Restricted Common Interests
 
—

 
—

 
—

 
—

JGW LLC unvested Restricted Common Interests
 
—

 
—

 
—

 
—

Dilutive potential common shares
 
—

 
—

 
—

 
—

Denominator for diluted EPS - Adjusted weighted average shares of Class A common stock
 
15,810,703

 
15,663,475

 
15,772,732

 
15,633,696

 
 
 
 
 
 
 
 
 
Basic loss per share of Class A common stock
 
$
(0.15
)
 
$
(1.19
)
 
$
(1.05
)
 
$
(2.92
)
Diluted loss per share of Class A common stock
 
$
(0.15
)
 
$
(1.19
)
 
$
(1.05
)
 
$
(2.92
)

46
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


21. Business Segments
The Company's business segments are determined based on products and services offered, as well as the nature of the related business activities, and reflect the manner in which financial information is currently evaluated by management. The Company has identified the following two reportable segments: (i) Structured Settlements and (ii) Home Lending.
The Company's Chief Operating Decision Maker ("CODM") evaluates reportable segments using Segment Adjusted Earnings Before Interest Expense, Income Taxes, Depreciation and Amortization ("Segment Adjusted EBITDA") for purposes of making decisions about allocating resources and evaluating their performance. The Company defines Segment Adjusted EBITDA as net income (loss) under U.S. GAAP before non-cash compensation expenses, certain other expenses, provision for or benefit from income taxes, depreciation and amortization and, for the Structured Settlements segment, amounts related to the consolidation of the securitization and permanent financing trusts the Company uses to finance its business, interest expense associated with its senior secured credit facility, debt issuance costs and broker and legal fees incurred in connection with sales of finance receivables.
During 2016, the CODM began using Segment Adjusted EBITDA as the primary means by which he evaluates segment performance since (i) Segment Adjusted EBITDA represents a better measure of the Company's operating performance, especially for the Structured Settlements segment because the operations of the VIEs do not impact the business segments' performance and (ii) Segment Adjusted EBITDA is the metric used in determining whether performance-based restricted stock units issued to management will vest. Prior periods have been adjusted to reflect the current measurement method.
The application and development of management reporting methodologies is a dynamic process and is subject to periodic enhancements. The implementation of these enhancements to the internal management reporting methodology may materially affect the results disclosed for each segment with no impact on consolidated results. Whenever significant changes to management reporting methodologies take place, prior period information is reclassified whenever practicable. Additionally, Segment Adjusted EBITDA is not indicative of cash flow generation.
Below is a summary of Segment Adjusted EBITDA, a measure of the Company's segments' profitability.
 
 
Structured Settlements
 
Home Lending
 
Other Adjustments/Eliminations
 
Subtotal Reportable Segments
 
 
(In thousands)
Three Months Ended September 30, 2017
 
 
 
 
 
 
 
 
Segment Adjusted EBITDA
 
$
8,383

 
$
4,129

 
—

 
$
12,512

 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
Segment Adjusted EBITDA
 
$
4,635

 
$
9,423

 
—

 
$
14,058

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
 
Segment Adjusted EBITDA
 
$
13,229

 
$
11,877

 
—

 
$
25,106

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
Segment Adjusted EBITDA
 
$
9,404

 
$
23,673

 
—

 
$
33,077


47
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


The following table presents certain information regarding the Company's business segments.
 
 
Structured Settlements
 
Home Lending
 
Other Adjustments/Eliminations
 
Consolidated
 
 
(In thousands)
Three Months Ended September 30, 2017
 
 
 
 
 
 
 
 
Total revenues
 
$
85,953

 
$
32,747

 
—

 
$
118,700

Total assets
 
4,723,910

 
385,692

 
—

 
5,109,602

 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
Total revenues
 
$
37,302

 
$
31,495

 
—

 
$
68,797

Total assets
 
4,655,253

 
449,506

 
—

 
5,104,759

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
 
Total revenues
 
$
242,938

 
$
81,870

 
—

 
$
324,808

Total assets
 
4,723,910

 
385,692

 
—

 
5,109,602

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
Total revenues
 
$
137,961

 
$
80,136

 
—

 
$
218,097

Total assets
 
4,655,253

 
449,506

 
—

 
5,104,759


48
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


Below is a reconciliation of Segments' Adjusted EBITDA, a measure of the Company's segments' profitability for the Company's two reportable segments, to loss before income taxes for the three months ended September 30, 2017 and 2016:
 
 
Three Months Ended September 30, 2017
 
Three Months Ended September 30, 2016
 
 
(In thousands)
Structured Settlements Segment Adjusted EBITDA
 
$
8,383

 
$
4,635

Home Lending Segment Adjusted EBITDA
 
4,129

 
9,423

Subtotal Segment Adjusted EBITDA for Reportable Segments
 
$
12,512

 
$
14,058

 
 
 
 
 
Securitization-related adjustments:
 
 
 
 
Unrealized gain (loss) on finance receivables, long-term debt and derivatives post securitization due to changes in interest rates
 
$
6,273

 
$
(32,495
)
Interest income from securitized finance receivables
 
43,647

 
40,610

Interest income on retained interests in finance receivables
 
(530
)
 
(4,041
)
Servicing income on securitized finance receivables
 
(1,303
)
 
(1,280
)
Interest expense on long-term debt related to securitization and permanent financing trusts
 
(43,656
)
 
(39,387
)
Professional fees relating to securitizations
 
(1,338
)
 
(1,380
)
Credit (provision) for losses associated with permanently financed VIEs
 
(5
)
 
(543
)
Subtotal of securitization related adjustments
 
$
3,088

 
$
(38,516
)
Other adjustments:
 
 
 
 
Share based compensation
 
$
(330
)
 
$
(367
)
Impact of pre-funding on unsecuritized finance receivables
 
—

 
(2,861
)
Lease termination, severance and other restructuring related expenses
 
(2,400
)
 
(747
)
Debt modification expense
 
—

 
97

Impairment charges and loss on disposal of assets
 
(8,369
)
 
—

Term loan interest expense
 
(10,531
)
 
(10,184
)
Debt issuance
 
(2,252
)
 
(2,584
)
Broker and legal fees incurred in connection with sale of finance receivables
 
—

 
(404
)
Depreciation and amortization
 
(937
)
 
(1,182
)
Loss before income taxes
 
$
(9,219
)
 
$
(42,690
)

49
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


Below is a reconciliation of Segments' Adjusted EBITDA, a measure of the Company's segments' profitability for the Company's two reportable segments, to loss before income taxes for the nine months ended September 30, 2017 and 2016:
 
 
Nine Months Ended September 30, 2017
 
Nine Months Ended September 30, 2016
 
 
(In thousands)
Structured Settlements Segment Adjusted EBITDA
 
$
13,229

 
$
9,404

Home Lending Segment Adjusted EBITDA
 
11,877

 
23,673

Subtotal Segment Adjusted EBITDA for Reportable Segments
 
$
25,106

 
$
33,077

 
 
 
 


Securitization-related adjustments:
 
 
 


Unrealized gain (loss) on finance receivables, long-term debt and derivatives post securitization due to changes in interest rates
 
$
10,247

 
$
(83,801
)
Interest income from securitized finance receivables
 
134,025

 
134,153

Interest income on retained interests in finance receivables
 
(1,360
)
 
(15,798
)
Servicing income on securitized finance receivables
 
(3,829
)
 
(3,919
)
Interest expense on long-term debt related to securitization and permanent financing trusts
 
(133,325
)
 
(119,230
)
Swap termination expense related to securitization entities
 
—

 
(3,053
)
Professional fees relating to securitizations
 
(4,044
)
 
(4,223
)
Credit (provision) for losses associated with permanently financed VIEs
 
192

 
(543
)
Subtotal of securitization related adjustments
 
$
1,906

 
$
(96,414
)
Other adjustments:
 
 
 
 
Share based compensation
 
$
(755
)
 
$
(997
)
Impact of pre-funding on unsecuritized finance receivables
 
3,199

 
—

Lease termination, severance and other restructuring related expenses
 
(8,566
)
 
(3,486
)
Debt modification expense
 
—

 
(2,258
)
Impairment charges and loss on disposal of assets
 
(8,369
)
 
(5,483
)
Term loan interest expense
 
(30,777
)
 
(30,375
)
Debt issuance
 
(4,675
)
 
(2,612
)
Broker and legal fees incurred in connection with sale of finance receivables
 
—

 
(1,959
)
Depreciation and amortization
 
(3,204
)
 
(3,646
)
Loss before income taxes
 
$
(26,135
)
 
$
(114,153
)

50
The J.G. Wentworth Company
Notes to the Condensed Consolidated Financial Statements (Unaudited)


22. Cost Savings Activities
In late 2015, the Company initiated a cost reduction plan to reduce excess capacity and improve efficiency within the business units. The associated workforce reductions in connection with the Company's cost savings activities were substantially complete as of June 30, 2016. During the three and nine months ended September 30, 2016, the Company incurred $0.1 million and $2.8 million, respectively, in severance charges, which were included within compensation and benefits in the condensed consolidated statements of operations.
In addition, the Company recorded lease termination charges of $0.2 million and $0.8 million during the three months ended September 30, 2017 and 2016, respectively, and $1.7 million and $0.8 million during the nine months ended September 30, 2017 and 2016, respectively, which were included within the general and administrative line item of its condensed consolidated statements of operations. Lease termination charges represent the fair value of the liability at the cease use date and determined based on the remaining lease rental payments obligation reduced by estimated sublease income that could be reasonably obtained for the property.
As a result of timing related to the relocation to the new office for our Structured Settlements segment and principal executive offices, the Company estimates the remaining lease termination charges of $0.4 million to be recorded and recognized in future periods.
Both the severance liability and the lease termination costs are included in accrued expenses and accounts payable on the Company's condensed consolidated balance sheets. A reconciliation of the liabilities associated with the cost reduction plan by reportable segment are as follows:
 
 
Structured Settlements
 
Home Lending
 
Consolidated
 
 
(In thousands)
Balance at December 31, 2016
 
$
1,201

 
$
90

 
$
1,291

Payments
 
(1,139
)
 
(90
)
 
(1,229
)
Adjustments
 
1,589

 
71

 
1,660

Balance at September 30, 2017
 
$
1,651

 
$
71

 
$
1,722

23. Subsequent Events
As the Company disclosed in the Current Report on Form 8-K which was filed with the U.S. Securities and Exchange Commission on November 9, 2017, the Company Parties entered into a Restructuring Support Agreement with certain lenders and certain members of The J.G. Wentworth Company, LLC to support a comprehensive restructuring of the Company’s long-term debt and existing equity, which is expected to be effectuated through a pre-packaged Chapter 11 plan of reorganization pursuant to cases commenced under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The Restructuring Support Agreement may be terminated upon the occurrence of certain events, including, amongst others, the failure to meet specified milestones relating to filing of the Chapter 11 Cases and confirmation and consummation of the Plan, as well as in the event of certain breaches by the parties under the Restructuring Support Agreement. If the restructuring contemplated by the Restructuring Support Agreement is consummated, the existing Credit Facility with a total of $449.5 million will be extinguished, a new secured revolving credit facility between $65.0 million and $70.0 million will be available to the Company, the lenders under the Credit Facility will receive at least 95.5% of new equity of the Company in exchange for the extinguishment, and all existing equity interests of the Company would be canceled without recovery. The Restructuring Support Agreement is subject to termination if the effective date of the Plan has not occurred within 21 days after entry by the Bankruptcy Court of an order confirming the Plan. The Plan is expected to be subject to certain conditions, including the obtaining of certain regulatory and third party approvals, and emergence from the Chapter 11 Cases is anticipated in or about January 2018. The Company expects ordinary-course operations to continue substantially uninterrupted during and after the Chapter 11 Cases.
On November 14, 2017, the Company filed its post-effective amendments to its previously filed Form S-3 and Form S-8 to terminate the effectiveness of the Registration Statement and to remove from registration its Class A common stock shares that remain unsold at the termination of the offering covered by the Registration Statement.

51

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. Some of the information in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing, contains forward-looking statements that involve risks and uncertainties. You should read the "Risk Factors" and the "Cautionary Statement Regarding Forward-Looking Statements" sections of this Quarterly Report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are focused on providing direct-to-consumer access to financing solutions through a variety of avenues, including: mortgage lending, structured settlement, annuity and lottery payment purchasing, prepaid cards, and access to providers of personal loans. Our direct-to-consumer businesses use digital channels, television, direct mail, and other channels to offer access to financing solutions. We warehouse, securitize, sell or otherwise finance the financial assets that we purchase in transactions that are structured to ultimately generate cash proceeds to us that exceed the purchase price we paid for those assets.
We currently operate our business through two business segments: (i) Structured Settlements and (ii) Home Lending. Our Structured Settlements segment provides liquidity to customers by purchasing structured settlements, annuities and lottery winnings. Structured Settlements also includes corporate activities, payment solutions, pre-settlements and providing (i) access to providers of personal lending and (ii) access to providers of funding for pre-settled legal claims. Our Home Lending segment specializes in originating, selling and servicing residential mortgage loans.
Consolidated Financial Highlights
 
 
Three Months Ended September 30,
 
2017 vs. 2016
 
Nine Months Ended September 30,
 
2017 vs. 2016
 
 
2017
 
2016
 
$ Change
 
% Change
 
2017
 
2016
 
$ Change
 
% Change
 
 
(In thousands)
Total revenues
 
$
118,700

 
$
68,797

 
$
49,903

 
72.5
%
 
$
324,808

 
$
218,097

 
$
106,711

 
48.9
 %
Total expenses
 
127,919

 
111,487

 
16,432

 
14.7

 
350,943

 
332,250

 
18,693

 
5.6

Loss before income taxes
 
(9,219
)
 
(42,690
)
 
33,471

 
78.4

 
(26,135
)
 
(114,153
)
 
88,018

 
77.1

(Benefit) provision for income taxes
 
(2,705
)
 
(3,883
)
 
1,178

 
30.3

 
2,148

 
(16,787
)
 
18,935

 
112.8

Net loss
 
(6,514
)
 
(38,807
)
 
32,293

 
83.2

 
(28,283
)
 
(97,366
)
 
69,083

 
71.0

Less: net loss attributable to non-controlling interests
 
(4,200
)
 
(20,094
)
 
15,894

 
79.1

 
(11,757
)
 
(51,773
)
 
40,016

 
77.3

Net loss attributable to The J.G. Wentworth Company
 
$
(2,314
)
 
$
(18,713
)
 
$
16,399

 
87.6
%
 
$
(16,526
)
 
$
(45,593
)
 
$
29,067

 
63.8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total TRB purchases
 
$
207,820

 
$
171,511

 
$
36,309

 
21.2
%
 
$
533,879

 
$
547,840

 
$
(13,961
)
 
(2.5
)%
Interest rate locks - volume
 
$
1,884,059

 
$
1,610,071

 
$
273,988

 
17.0
%
 
$
4,673,835

 
$
4,115,595

 
$
558,240

 
13.6
 %
Loans closed - volume
 
$
1,059,267

 
$
1,035,417

 
$
23,850

 
2.3
%
 
$
2,581,353

 
$
2,449,619

 
$
131,734

 
5.4
 %
For the Three Months Ended September 30, 2017
The $33.5 million decrease in our loss before income taxes during the three months ended September 30, 2017 as compared to the same period in 2016 was principally due to a $47.1 million decrease in pre-tax loss from our Structured Settlements segment that was primarily the result of a $45.6 million increase in realized and unrealized gains (losses) on VIE and other finance receivables, long term debt and derivatives driven by a favorable change in realized and unrealized gains on securitized finance receivables, debt, and derivatives as a result of the change in the interest rates between the periods and a favorable change in the unrealized loss on our residual interest assets and related debt, which were permanently refinanced in September 2016 at which time the Company elected the fair value option for the related debt coupled with an increase in total TRB purchases. Our Home Lending segment's generated loss before income taxes of $4.7 million for the three months ended September 30, 2017 compared to an income before income taxes of $8.9 million in the three months ended September 30, 2016, a decrease of $13.6 million. This was primarily as a result of an $8.4 million goodwill impairment charge, a $3.3 million increase in advertising expense, and a $1.8

52

million increase in compensation and benefits, partially offset by a $2.5 million decrease in realized and unrealized gains on sale of mortgage loans held for sale, net of direct costs.
We recorded a consolidated income tax benefit during the three months ended September 30, 2017 of $2.7 million compared to a benefit of $3.9 million for the three months ended September 30, 2016. Our overall effective tax rate was 29.3% for the three months ended September 30, 2017, as compared to an overall effective rate of 9.1% for the three months ended September 30, 2016. The change in the Company's effective tax rate was primarily the result of the differences in the projected book and taxable income along with the impact of the permanent differences for the respective years as of the balance sheet dates. These changes generate a state limitation on the utilization of net operating losses expected to be generated during the current year that are not more likely than not to be realized which also has an impact on the effective tax rate. The Company recorded a valuation allowance in the three months ended September 30, 2016 due to the expectation that some of the deferred tax assets are not more likely than not to be realized. There has been no change to the valuation allowance as of September 30, 2017.
The net loss attributable to non-controlling interests represents the portion of loss attributable to the economic interests in JGW LLC held by the non-controlling Common Interestholders. The $4.2 million net loss attributable to the non-controlling interests for the three months ended September 30, 2017 represents the non-controlling interests' 45.1% weighted average economic interest in JGW LLC's net loss for the three months ended September 30, 2017. The $20.1 million net loss attributable to the non-controlling interests for the three months ended September 30, 2016 represents the non-controlling interests' 45.5% weighted average economic interest in JGW LLC's net income for the three months ended September 30, 2016.
For the Nine Months Ended September 30, 2017
The $88.0 million decrease in our loss before income taxes during the nine months ended September 30, 2017 as compared to the same period in 2016 was principally due to a $107.6 million decrease in pre-tax loss from our Structured Settlements segment that was primarily the result of a $101.6 million increase in realized and unrealized gains (losses) on VIE and other finance receivables, long term debt and derivatives driven by the change in the interest rates between the periods and a favorable change in the unrealized loss on our residual interest assets and related debt which were permanently refinanced in September 2016 at which time the Company elected the fair value option for the related debt. Our Home Lending segment's income before income taxes decreased $19.6 million primarily as a result of an $8.4 million goodwill impairment charge, a $7.8 million increase in advertising expense and a $3.5 million increase in compensation and benefits.
We recorded a consolidated income tax provision during the nine months ended September 30, 2017 of $2.1 million compared to a benefit of $16.8 million for the nine months ended September 30, 2016. Our overall effective tax rate was (8.2)% for the nine months ended September 30, 2017, as compared to an overall effective rate of 14.7% for the nine months ended September 30, 2016. The change in the Company's effective tax rate was primarily the result of the differences in the projected book and taxable income along with the impact of the permanent differences for the respective years as of the balance sheet dates. These changes generate a state limitation on the utilization of net operating losses expected to be generated during the current year that are not more likely than not to be realized which also has an impact on the effective tax rate. The Company recorded a valuation allowance in the three months ended September 30, 2016 due to the expectation that some of the deferred tax assets are not more likely than not to be realized. There has been no change to the valuation allowance as of September 30, 2017.
The net loss attributable to non-controlling interests represents the portion of loss attributable to the economic interests in JGW LLC held by the non-controlling Common Interestholders. The $11.8 million net loss attributable to the non-controlling interests for the nine months ended September 30, 2017 represents the non-controlling interests' 45.2% weighted average economic interest in JGW LLC's net loss for the nine months ended September 30, 2017. The $51.8 million net loss attributable to the non-controlling interests for the nine months ended September 30, 2016 represents the non-controlling interests' 45.5% weighted average economic interest in JGW LLC's net income for the nine months ended September 30, 2016.
Regulatory Developments
We are subject to federal, state and, in some cases, local regulation in the jurisdictions in which we operate. These regulations govern and affect many aspects of our business as set forth more fully under "Part 1, Item 1. Business" in our Annual Report on Form 10-K for the year ended December 31, 2016. There were no material changes in those federal, state and local regulations during the nine months ended September 30, 2017.

53

Structured Settlements
Results of Operations
The table below presents the results of operations for our Structured Settlements segment for the three and nine months ended September 30, 2017 and 2016.
 
 
Three Months Ended September 30,
 
2017 vs. 2016
 
Nine Months Ended September 30,
 
2017 vs. 2016
 
 
2017
 
2016
 
$ Change
 
% Change
 
2017
 
2016
 
$ Change
 
% Change
 
 
(In thousands)
REVENUES
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
45,788

 
$
42,982

 
$
2,806

 
6.5
 %
 
$
141,293

 
$
142,491

 
$
(1,198
)
 
(0.8
)%
Realized and unrealized gains (losses) on VIE and other finance receivables, long-term debt and derivatives
 
36,472

 
(9,104
)
 
45,576

 
500.6

 
89,303

 
(12,339
)
 
101,642

 
823.7

Servicing, broker, and other fees
 
1,465

 
1,048

 
417

 
39.8

 
5,713

 
3,888

 
1,825

 
46.9

Realized and unrealized gains on marketable securities, net
 
2,228

 
2,376

 
(148
)
 
(6.2
)
 
6,629

 
3,921

 
2,708

 
69.1

Total revenues
 
$
85,953

 
$
37,302

 
$
48,651

 
130.4
 %
 
$
242,938

 
$
137,961

 
$
104,977

 
76.1
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EXPENSES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advertising
 
$
11,214

 
$
10,842

 
$
372

 
3.4
 %
 
$
33,891

 
$
34,682

 
$
(791
)
 
(2.3
)%
Interest expense
 
55,643

 
52,833

 
2,810

 
5.3

 
168,894

 
163,543

 
5,351

 
3.3

Compensation and benefits
 
6,834

 
7,247

 
(413
)
 
(5.7
)
 
19,539

 
25,238

 
(5,699
)
 
(22.6
)
General and administrative
 
4,381

 
5,540

 
(1,159
)
 
(20.9
)
 
14,396

 
16,078

 
(1,682
)
 
(10.5
)
Professional and consulting
 
5,097

 
3,464

 
1,633

 
47.1

 
14,115

 
10,914

 
3,201

 
29.3

Debt issuance
 
2,252

 
2,584

 
(332
)
 
(12.8
)
 
4,672

 
3,132

 
1,540

 
49.2

Securitization debt maintenance
 
1,326

 
1,380

 
(54
)
 
(3.9
)
 
4,004

 
4,226

 
(222
)
 
(5.3
)
Provision for losses
 
579

 
1,411

 
(832
)
 
(59.0
)
 
1,853

 
3,071

 
(1,218
)
 
(39.7
)
Depreciation and amortization
 
534

 
749

 
(215
)
 
(28.7
)
 
2,039

 
2,359

 
(320
)
 
(13.6
)
Installment obligations expense, net
 
2,598

 
2,817

 
(219
)
 
(7.8
)
 
7,942

 
5,279

 
2,663

 
50.4

Impairment charges
 
—

 
—

 
—

 
—

 
—

 
5,483

 
(5,483
)
 
(100.0
)
Total expenses
 
$
90,458

 
$
88,867

 
$
1,591

 
1.8
 %
 
$
271,345

 
$
274,005

 
$
(2,660
)
 
(1.0
)%
Loss before income taxes
 
(4,505
)
 
(51,565
)
 
47,060

 
91.3

 
(28,407
)
 
(136,044
)
 
107,637

 
79.1

(Benefit) provision for income taxes
 
(2,705
)
 
(3,883
)
 
1,178

 
30.3

 
2,148

 
(16,787
)
 
18,935

 
112.8

Net loss
 
$
(1,800
)
 
$
(47,682
)
 
$
45,882

 
96.2
 %
 
$
(30,555
)
 
$
(119,257
)
 
$
88,702

 
74.4
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TRB PURCHASES
 
 
 
 
 


 


 
 
 
 
 
 
 
 
Guaranteed structured settlements, annuities and lotteries
 
$
176,461

 
$
142,840

 
$
33,621

 
23.5
 %
 
$
462,923

 
$
457,243

 
$
5,680

 
1.2
 %
Life contingent structured settlements and annuities
 
31,359

 
28,671

 
2,688

 
9.4

 
70,956

 
90,597

 
(19,641
)
 
(21.7
)
Total TRB purchases
 
$
207,820

 
$
171,511

 
$
36,309

 
21.2
 %
 
$
533,879

 
$
547,840

 
$
(13,961
)
 
(2.5
)%
For the Three Months Ended September 30, 2017
Total revenues for the three months ended September 30, 2017 were $86.0 million, an increase of $48.7 million from $37.3 million for the three months ended September 30, 2016. The increase was primarily attributable to a $45.6 million increase in realized and unrealized gains (losses) on VIE and other finance receivables, long-term debt and derivatives coupled with a $2.8 million increase in interest income.

54

Interest income for the three months ended September 30, 2017 and 2016 consisted of the following:
 
 
Three Months Ended September 30,
 
2017 vs. 2016
 
 
2017
 
2016
 
$ Change
 
% Change
 
 
(In thousands)
Accretion income on finance receivables
 
$
44,414

 
$
41,189

 
$
3,225

 
7.8
 %
Interest income on installment obligations
 
370

 
442

 
(72
)
 
(16.3
)
Interest income on pre-settlement funding transaction receivables
 
638

 
1,116

 
(478
)
 
(42.8
)
Interest income on notes receivable
 
224

 
208

 
16

 
7.7

Other interest income
 
142

 
27

 
115

 
425.9

Total interest income
 
$
45,788

 
$
42,982

 
$
2,806

 
6.5
 %
The $3.2 million increase in accretion income on finance receivables was primarily due to an increase in the average fair value discount rate used to calculate interest income on the associated securitized finance receivables, offset by a decrease in the average outstanding securitized finance receivables balance between the periods. The $0.5 million decrease in interest income on pre-settlement funding transaction receivables was due to a reduction in the associated pre-settlement receivables resulting from management's decision to curtail purchases of such assets in April 2015.
Realized and unrealized (losses) gains on VIE and other finance receivables, long-term debt, and derivatives for the three months ended September 30, 2017 and 2016 consisted of the following:
 
 
Three Months Ended September 30,
 
2017 vs. 2016
 
 
2017
 
2016
 
$ Change
 
% Change
 
 
(In thousands)
Day one gains
 
$
27,549

 
$
31,542

 
$
(3,993
)
 
(12.7
)%
Gains (losses) from the sale of finance receivables and changes in fair value subsequent to day one
 
2,650

 
(8,152
)
 
10,802

 
132.5

Total realized and unrealized gains on unsecuritized finance receivables
 
30,199

 
23,390

 
6,809

 
29.1

Realized and unrealized losses on interest rate swaps related to warehouse facilities
 
—

 
—

 
—

 
—

Total realized and unrealized gains on unsecuritized finance receivables and derivatives
 
30,199

 
23,390

 
6,809

 
29.1

Unrealized gains (losses) on securitized finance receivables, debt and derivatives
 
6,273

 
(32,494
)
 
38,767

 
119.3

Total realized and unrealized gains (losses) on securitized finance receivables, debt and derivatives
 
6,273

 
(32,494
)
 
38,767

 
119.3

Total realized and unrealized gains (losses) on VIE and other finance receivables, long-term debt and derivatives
 
$
36,472

 
$
(9,104
)
 
$
45,576

 
500.6
 %
Total realized and unrealized gains on unsecuritized finance receivables represent (i) unrealized gains on finance receivables acquired from customers prior to their securitization and (ii) realized gains and losses resulting from their inclusion in direct asset sale transactions.
Newly acquired finance receivable assets are accounted for at fair value until they are securitized or sold pursuant to a direct asset sale. Subsequent to acquisition but prior to securitization or sale, the Company generally borrows against purchased finance receivables pursuant to one of its revolving credit facilities. When the Company borrows against its finance receivables, it transfers the encumbered assets into a VIE. If the finance receivables are securitized, immediately prior to securitization, the securitized assets are adjusted to their current fair value and the resulting change in fair value is included in gains (losses) from changes in fair value subsequent to day one. If the finance receivables are included in a direct asset sale, the previously recognized unrealized gains (losses) are reversed and the difference between the purchase price and sales price is recorded as a realized gain and included in gains (losses) from changes in fair value subsequent to day one. The difference between the price paid to acquire finance receivables and their fair value at acquisition is referred to as "day one gains." Changes in fair value of finance receivables acquired in prior months and finance receivables sold are referred to as "gains (losses) from the sale of finance receivables and changes in fair value subsequent to day one."

55

Total realized and unrealized gains on unsecuritized finance receivables for the three months ended September 30, 2017 increased $6.8 million from the three months ended September 30, 2016 primarily due to an overall favorable movement in the fair value interest rates used to value these assets during the respective periods.
The $38.8 million change in unrealized gains (losses) on securitized finance receivables, debt and derivatives was primarily due to a $31.3 million favorable change in the unrealized loss on our residual interest assets and related debt which were permanently refinanced in September 2016 at which time the Company elected the fair value option for the related debt. Prior to refinancing the residual interest assets, the related debt was held at cost with no associated unrealized gain or loss. In addition, a net $7.5 million favorable change in unrealized gains on other securitized finance receivables, debt and derivatives resulting principally from movements in the fair value discount rates used to value these items.
Total expenses for the three months ended September 30, 2017 were $90.5 million, an increase of $1.6 million from total expenses of $88.9 million for the three months ended September 30, 2016.
Advertising expense, which consists of our marketing costs including television, internet, direct mail and other related expenses, increased to $11.2 million for the three months ended September 30, 2017 from $10.8 million for the three months ended September 30, 2016, primarily due to a $1.7 million increase in our television spend, offset by a $1.4 million decrease in our internet related, direct mailing, and other advertising expenses. We continually assess the effectiveness of our advertising initiatives and adjust the timing, investment and advertising channels on an ongoing basis.
Interest expense, which includes interest on our securitization and other VIE long-term debt, warehouse facilities and our term loan, increased by 5.3% to $55.6 million for the three months ended September 30, 2017 from $52.8 million for the three months ended September 30, 2016. The $2.8 million increase was primarily due to: (i) a $2.3 million increase in interest expense associated with our securitized debt that primarily resulted from an increase in the interest rate used to calculate interest expense, and (ii) a $0.6 million increase in interest expense on our term loan payable and warehouse lines.
General and administrative expense decreased to $4.4 million for the three months ended September 30, 2017 from $5.5 million for the three months ended September 30, 2016. The $1.1 million decrease was primarily due to (i) a $0.4 million decrease in broker fees paid in connection with direct asset sales and (ii) a $0.8 million decrease in rent expense associated with lease termination charges incurred during the three months ended September 30, 2016.
Professional and consulting costs increased to $5.1 million for the three months ended September 30, 2017 from $3.5 million for the three months ended September 30, 2016. The $1.6 million increase was primarily due to $2.2 million in third party fees incurred in connection with the Company's ongoing deleveraging efforts, offset by a $0.6 million decrease in client-related legal and other professional fees.
For the Nine Months Ended September 30, 2017
Total revenues for the nine months ended September 30, 2017 were $242.9 million, an increase of $105.0 million from $138.0 million for the nine months ended September 30, 2016. The increase was primarily attributable to a $101.6 million favorable change in realized and unrealized gains (losses) on VIE and other finance receivables, long-term debt and derivatives coupled with a $2.7 million increase in realized and unrealized gains on marketable securities, net, partially offset by a $1.2 million decrease in interest income.
Interest income for the nine months ended September 30, 2017 and 2016 consisted of the following:
 
 
Nine Months Ended September 30,
 
2017 vs. 2016
 
 
2017
 
2016
 
$ Change
 
% Change
 
 
(In thousands)
Accretion income on finance receivables
 
$
136,569

 
$
136,289

 
$
280

 
0.2
 %
Interest income on installment obligations
 
1,313

 
1,358

 
(45
)
 
(3.3
)
Interest income on pre-settlement funding transaction receivables
 
2,336

 
4,150

 
(1,814
)
 
(43.7
)
Interest income on notes receivable
 
660

 
619

 
41

 
6.6

Other interest income
 
415

 
75

 
340

 
453.3

Total interest income
 
$
141,293

 
$
142,491

 
$
(1,198
)
 
(0.8
)%
The $1.8 million decrease in interest income on pre-settlement funding transaction receivables was due to a reduction in the associated pre-settlement receivables resulting from management's decision to curtail purchases of such assets in April 2015. The $0.3 million increase in accretion income on finance receivables was primarily due to an increase in the average fair value discount rate used to calculate interest income on the associated securitized finance receivables, offset by a decrease in the average outstanding securitized finance receivables balance between the periods.

56

Realized and unrealized (losses) gains on VIE and other finance receivables, long-term debt, and derivatives for the nine months ended September 30, 2017 and 2016 consisted of the following:
 
 
Nine Months Ended September 30,
 
2017 vs. 2016
 
 
2017
 
2016
 
$ Change
 
% Change
 
 
(In thousands)
Day one gains
 
$
72,648

 
$
89,878

 
$
(17,230
)
 
(19.2
)%
Gains (losses) from the sale of finance receivables and changes in fair value subsequent to day one
 
6,226

 
(13,819
)
 
20,045

 
145.1

Total realized and unrealized gains on unsecuritized finance receivables
 
78,874

 
76,059

 
2,815

 
3.7

Realized and unrealized gains (losses) on interest rate swaps related to warehouse facilities
 
182

 
(1,544
)
 
1,726

 
111.8

Total realized and unrealized gains on unsecuritized finance receivables and derivatives
 
79,056

 
74,515

 
4,541

 
6.1

Unrealized gains (losses) on securitized finance receivables, debt and derivatives
 
10,247

 
(83,801
)
 
94,048

 
112.2

Loss on termination of interest rate swaps related to securitized debt
 
—

 
(3,053
)
 
3,053

 
100.0

Total realized and unrealized gains (losses) on securitized finance receivables, debt and derivatives
 
10,247

 
(86,854
)
 
97,101

 
111.8

Total realized and unrealized gains (losses) on VIE and other finance receivables, long-term debt and derivatives
 
$
89,303

 
$
(12,339
)
 
$
101,642

 
823.7
 %
Total realized and unrealized gains on unsecuritized finance receivables for the nine months ended September 30, 2017 increased $2.8 million from the nine months ended September 30, 2016 primarily due to an overall favorable movement in the fair value interest rates used to value these assets during the respective periods.
The $0.2 million gain on interest rate swaps related to warehouse facilities during the nine months ended September 30, 2017 was the result of the termination of interest rate swaps with a notional value of $21.8 million that were executed as part of our strategy to hedge interest rate risk. The $1.5 million loss on interest rate swaps related to warehouse facilities during the nine months ended September 30, 2016 was the result of the termination of interest rate swaps with a notional value of $75.2 million that were also executed as part of our interest rate hedging strategy.
The $94.0 million change in unrealized gains (losses) on securitized finance receivables, debt and derivatives was primarily due to a $72.9 million favorable change in the unrealized loss on our residual interest assets and related debt which were permanently refinanced in September 2016 at which time the Company elected the fair value option for the related debt. Prior to refinancing the residual interest assets, the related debt was held at cost with no associated unrealized gain or loss. In addition to the favorable change related to our residual interest assets and related debt, the change was due to (i) a net $10.1 million favorable change in unrealized gains on derivatives resulting principally from movements in the interest rates, and (ii) a $7.6 million favorable change in the unrealized loss on the securitized finance receivables, debt and derivatives associated with the Peachtree Structured Settlements LLC permanent financing facility primarily due to an early amortization event that occurred in the first quarter of 2016 which resulted in future excess cash flows being applied to the prepayment of the outstanding debt and derivatives.
There was no loss on the termination of interest rate swaps related to securitized debt during the nine months ended September 30, 2017. The $3.1 million loss on derivatives related to securitized debt during the nine months ended September 30, 2016 represents the loss on the termination of interest rate swaps related to the PSS securitized debt that had a notional value of $13.8 million.
Realized and unrealized gains on marketable securities, net, were $6.6 million for the nine months ended September 30, 2017, an increase of $2.7 million from $3.9 million for the nine months ended September 30, 2016, due to higher investment returns on marketable securities. The increase was offset by a corresponding increase in installment obligations expense, net. These amounts relate to the marketable securities and installment obligations payable on our condensed consolidated balance sheets. The marketable securities are owned by us, but are held to fully offset our installment obligation liability. Therefore, increases or decreases in gains on marketable securities do not impact our net (loss) income.
Total expenses for the nine months ended September 30, 2017 were $271.3 million, a decrease of $2.7 million from total expenses of $274.0 million for the nine months ended September 30, 2016.
Advertising expense, which consists of our marketing costs including television, internet, direct mail and other related expenses, decreased to $33.9 million for the nine months ended September 30, 2017 from $34.7 million for the nine months ended September 30, 2016, primarily due to a $6.4 million decrease in our internet related, direct mailing, and other advertising expenses

57

offset by a $5.4 million increase in our television spend. We continually assess the effectiveness of our advertising initiatives and adjust the timing, investment and advertising channels on an ongoing basis.
Interest expense, which includes interest on our securitization and other VIE long-term debt, warehouse facilities and our term loan, increased by 3.3% to $168.9 million for the nine months ended September 30, 2017 from $163.5 million for the nine months ended September 30, 2016. The $5.4 million increase was primarily due to a $6.3 million increase in interest expense associated with the increased debt from the permanent refinancing of the Residual Term Facility in September 2016, partially offset by a $1.2 million decrease in interest expense on our term loan payable and warehouse lines.
Compensation and benefits expense decreased to $19.5 million for the nine months ended September 30, 2017 from $25.2 million for the nine months ended September 30, 2016 primarily due to (i) a $3.2 million decrease in salaries, commissions and payroll taxes that resulted from a combination of lower headcount and TRB purchase volume in the nine months ended September 30, 2017 compared to the comparable period in the prior year and (ii) a $1.9 million decrease in severance expense between periods. During the nine months ended September 30, 2016, we recorded a severance charge of $2.4 million related to a headcount reduction of approximately 125 employees.
General and administrative expense decreased to $14.4 million for the nine months ended September 30, 2017 from $16.1 million for the nine months ended September 30, 2016. The $1.7 million decrease was primarily due to (i) a $0.7 million decrease in client promotional activities and (ii) a $1.5 million decrease in broker fees paid in connection with direct asset sales. This decrease was partially offset by (i) a $0.6 million increase in rent expense associated with lease termination charges incurred during the nine months ending September 30, 2017 and moving expenses incurred in connection with the Company's new leasing arrangement and the relocation to our new principal executive office.
Professional and consulting costs increased to $14.1 million for the nine months ended September 30, 2017 from $10.9 million for the nine months ended September 30, 2016. The $3.2 million increase was primarily due to $6.8 million in third party fees incurred in connection with the Company's ongoing deleveraging efforts, offset by a $3.6 million decrease in client-related legal and other professional fees.
The Company incurred $4.7 million in debt issuance costs during the nine months ended September 30, 2017 compared to $3.1 million for the nine months ended September 30, 2016. The $4.7 million of debt issuance costs incurred in the nine months ended September 30, 2017 primarily related to fees incurred in connection with the initial close of the 2017-1 and 2017-2 securitization transactions. During the nine months ended September 30, 2016, the Company incurred $3.1 million of expenses to amend certain provisions of our previously issued securitization debt.
During the second quarter of 2016, we tested for potential impairment relating to the Structured Settlements segment's indefinite-lived trade name and finite-lived customer-relationships intangible assets that were acquired in connection with the 2011 acquisition of Orchard Acquisition Company. As a result of this analysis, we determined the trade name and the customer-relationships intangible assets within the Structured Settlements reporting unit were impaired and recorded an impairment charge of $5.5 million in the condensed consolidated statements of operations for the nine months ended September 30, 2016. The $5.5 million impairment charge was comprised of the following: (i) a $2.8 million write-down of the trade name and (ii) a $2.7 million write-down of the customer relationships. We also determined that the remaining useful lives of our intangible assets within the Structured Settlements reporting unit were less than previously assigned and consequently revised them to their currently estimated useful lives of approximately three years. We also determined in connection with this analysis that the trade name is a finite-lived asset.

58

Home Lending
Results of Operations
The table below presents the results of operations for our Home Lending segment for the three and nine months ended September 30, 2017 and 2016.
 
 
Three Months Ended September 30,
 
2017 vs. 2016
 
Nine Months Ended September 30,
 
2017 vs. 2016
 
 
2017
 
2016
 
$ Change
 
% Change
 
2017
 
2016
 
$ Change
 
% Change
 
 
(Dollars in thousands)
REVENUES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
1,592

 
$
1,009

 
$
583

 
57.8
 %
 
$
3,444

 
$
2,720

 
$
724

 
26.6
 %
Realized and unrealized gains on sale of mortgage loans held for sale, net of direct costs
 
22,024

 
24,495

 
(2,471
)
 
(10.1
)
 
54,060

 
61,781

 
(7,721
)
 
(12.5
)
Changes in mortgage servicing rights, net
 
3,240

 
1,480

 
1,760

 
118.9

 
8,321

 
3,320

 
5,001

 
150.6

Servicing, broker, and other fees
 
3,024

 
1,975

 
1,049

 
53.1

 
8,716

 
5,870

 
2,846

 
48.5

Loan origination fees
 
2,867

 
2,536

 
331

 
13.1

 
7,329

 
6,445

 
884

 
13.7

Total revenues
 
$
32,747

 
$
31,495

 
$
1,252

 
4.0
 %
 
$
81,870

 
$
80,136

 
$
1,734

 
2.2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EXPENSES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advertising
 
6,368

 
3,052

 
3,316

 
108.7

 
$
15,314

 
$
7,509

 
$
7,805

 
103.9
 %
Interest expense
 
2,326

 
1,728

 
598

 
34.6

 
5,347

 
4,318

 
1,029

 
23.8

Compensation and benefits
 
15,297

 
13,545

 
1,752

 
12.9

 
38,125

 
34,597

 
3,528

 
10.2

General and administrative
 
2,459

 
2,192

 
267

 
12.2

 
6,036

 
5,744

 
292

 
5.1

Professional and consulting
 
594

 
513

 
81

 
15.8

 
1,410

 
1,472

 
(62
)
 
(4.2
)
Provision for losses
 
688

 
664

 
24

 
3.6

 
1,066

 
1,576

 
(510
)
 
(32.4
)
Direct subservicing costs
 
957

 
493

 
464

 
94.1

 
2,766

 
1,742

 
1,024

 
58.8

Depreciation and amortization
 
403

 
433

 
(30
)
 
(6.9
)
 
1,165

 
1,287

 
(122
)
 
(9.5
)
Impairment charges
 
8,369

 
—

 
8,369

 
100.0

 
8,369

 
—

 
8,369

 
100.0

Total expenses
 
$
37,461

 
$
22,620

 
$
14,841

 
65.6
 %
 
$
79,598

 
$
58,245

 
$
21,353

 
36.7
 %
(Loss) income before income taxes
 
(4,714
)
 
8,875

 
(13,589
)
 
(153.1
)
 
2,272

 
21,891

 
(19,619
)
 
(89.6
)
Provision for income taxes
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Net (loss) income
 
$
(4,714
)
 
$
8,875

 
$
(13,589
)
 
(153.1
)%
 
$
2,272

 
$
21,891

 
$
(19,619
)
 
(89.6
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage Originations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate locks - units
 
7,129

 
6,110

 
1,019

 
16.7
 %
 
17,896

 
15,593

 
2,303

 
14.8
 %
Interest rate locks - volume
 
$
1,884,059

 
$
1,610,071

 
$
273,988

 
17.0

 
$
4,673,835

 
$
4,115,595

 
$
558,240

 
13.6

Loans closed - units
 
4,025

 
3,890

 
135

 
3.5

 
9,947

 
9,185

 
762

 
8.3

Loans closed - volume
 
$
1,059,267

 
$
1,035,417

 
$
23,850

 
2.3

 
$
2,581,353

 
$
2,449,619

 
$
131,734

 
5.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at 9/30/2017
 
Balance at 12/31/2016
Mortgage Servicing:
 
 
 
 
 
 
 
 
 
 
Unpaid principal balance
 
 
 
 
 
 
 
 
 
$
4,899,864
 
 
$
4,060,878
 
Loan count - servicing
 
 
 
 
 
 
 
 
 
20,370
 
 
16,817
 
Average loan amount
 
 
 
 
 
 
 
 
 
$
241
 
 
$
241
 
Average interest rate
 
 
 
 
 
 
 
 
 
3.61
%
 
3.57
 %

59

For the Three Months Ended September 30, 2017
Total revenues for the three months ended September 30, 2017 were $32.7 million, an increase of $1.2 million from $31.5 million for the three months ended September 30, 2016. The increase was primarily attributable to a $1.8 million favorable change in our MSRs and a $1.0 million increase in servicing, broker, and other fees, partially offset by a $2.5 million decrease in realized and unrealized gains on sale of mortgage loans held for sale, net of direct costs.
In evaluating performance, we net the gains on mortgage loans sold, unrealized gains on mortgage loans held for sale, IRLCs, and associated derivative instruments (i.e., forward sale commitments to deliver mortgage loans and forward sales of MBS) resulting from fair value mark-to-market adjustments, with direct costs such as fees paid to third parties to originate and sell the associated mortgage loans, and present it as realized and unrealized gains on sale of mortgage loans held for sale, net of direct costs, in our condensed consolidated statements of operations. During the three months ended September 30, 2017, we generated $23.8 million in gross revenue from the sale of mortgage loans, netted against $1.8 million in direct costs, as compared to the three months ended September 30, 2016, when we generated $26.3 million in gross revenue from the sale of mortgage loans, netted against $1.8 million in direct costs.
U.S. GAAP requires that MSRs initially be recorded at fair value at the time the underlying mortgage loans are sold with servicing rights retained. MSRs are subsequently measured at fair value at each reporting period. The increase in the fair value of our MSRs portfolio resulting from: (i) loans sold with servicing rights retained; (ii) the runoff of our MSRs portfolio including payoffs; and (iii) changes in fair valuation inputs and assumptions is included in changes in MSRs, net, in our condensed consolidated statements of operations. During the three months ended September 30, 2017, the fair value of our MSRs increased by $4.6 million due to the $439.8 million net increase in the unpaid principal balance of our MSRs portfolio, which was offset by a $1.3 million decrease in the fair value of MSRs resulting from the change in mortgage interest rates during the period. During the three months ended September 30, 2016, the fair value of our MSRs increased by $3.2 million due to the $362.1 million net increase in the unpaid principal balance of our MSRs portfolio, which was offset by a $1.8 million decrease in the fair value of MSRs resulting from the change in mortgage interest rates during the quarter.
Servicing, broker and other fees represent revenue recognized for servicing mortgage loans for various investors that are based on a contractual percentage of the outstanding principal balance. The primary driver of our servicing revenue is our MSRs portfolio. Servicing, broker and other fees increased to $3.0 million for the three months ended September 30, 2017 from $2.0 million for the three months ended September 30, 2016. The outstanding unpaid principal balance of serviced mortgages was $4.9 billion as of September 30, 2017, an increase of $439.8 million from June 30, 2017 and the outstanding unpaid principal balance of serviced mortgages was $3.7 billion as of September 30, 2016, an increase of $362.1 million from June 30, 2016.
Total expenses for the three months ended September 30, 2017 were $37.5 million, an increase of $14.8 million from total expenses of $22.6 million for the three months ended September 30, 2016.
Advertising expense, which consists of our marketing costs including television, internet, direct mail and other related expenses, increased to $6.4 million for the three months ended September 30, 2017 from $3.1 million for the three months ended September 30, 2016, primarily due to a $3.3 million increase in line with the direct-to-consumer growth plan and the response to the competitive environment due to shifts in consumer demand. We continually assess the effectiveness of our advertising initiatives and adjust the timing, investment and advertising channels on an ongoing basis.
Compensation and benefits expense increased to $15.3 million for the three months ended September 30, 2017 from $13.5 million for the three months ended September 30, 2016 primarily due to higher headcount and an increase in commissions resulting from a $23.9 million increase in closed loan production in the three months ended September 30, 2017 compared to the comparable period in the prior year.
General and administrative expense increased to $2.5 million for the three months ended September 30, 2017 from $2.2 million for the three months ended September 30, 2016. The $0.3 million increase was primarily due to increases in rent expense associated with lease termination charges incurred during the three months ended September 30, 2017, and additional expenses incurred in connection with the Company's new leasing arrangement.
    During the three months ended September 30, 2017, the Company re-evaluated its internal projections for its Home Lending reporting unit based on continued lower than anticipated profitability results, a reduction of its warehouse facilities and contemplation by the Company Parties to enter into the Restructuring Support Agreement which is expected to be effectuated through a pre-packaged Chapter 11 plan of reorganization. Accordingly, we determined these events constitute a triggering event requiring the Company to: (i) test the related indefinite-lived licenses and approvals intangible asset for impairment under ASC 350-30, (ii) test the related asset groups, including the finite-lived intangible assets, which include the trade name and the affinity relationships, for impairment under ASC 360-10 and (iii) perform a goodwill impairment analysis. As a result of the analysis, the Company recorded an $8.4 million goodwill impairment charge in the three months ended September 30, 2017.


60

For the Nine Months Ended September 30, 2017
Total revenues for the nine months ended September 30, 2017 were $81.9 million, an increase of $1.8 million from $80.1 million for the nine months ended September 30, 2016. The increase was primarily attributable to a $5.0 million increase in our MSRs coupled with a $2.8 million increase in servicing, broker, and other fees, partially offset by a $7.7 million decrease in realized and unrealized gains on sale of mortgage loans held for sale, net of direct costs.
During the nine months ended September 30, 2017, we generated $59.6 million in gross revenue from the sale of mortgage loans, netted against $5.5 million in direct costs, as compared to the nine months ended September 30, 2016, when we generated $66.5 million in gross revenue from the sale of mortgage loans, netted against $4.7 million in direct costs.
During the nine months ended September 30, 2017, the fair value of our MSRs increased by $8.7 million due to the $839.0 million net increase in the unpaid principal balance of our MSRs portfolio, which was offset by a $0.4 million decrease in the fair value of MSRs resulting from the change in mortgage interest rates at September 30, 2017 as compared to December 31, 2016. During the nine months ended September 30, 2016, the fair value of our MSRs increased by $6.4 million primarily due to the $684.5 million net increase in the unpaid principal balance of our MSRs portfolio, which was offset by a $3.1 million decrease in the fair value of MSRs resulting from the change in mortgage interest rates at September 30, 2016 as compared to December 31, 2015.
Servicing, broker and other fees increased to $8.7 million for the nine months ended September 30, 2017 from $5.9 million for the nine months ended September 30, 2016. The primary driver of our servicing revenue is our MSRs portfolio. The outstanding unpaid principal balance of serviced mortgages was $4.9 billion as of September 30, 2017, an increase of $839.0 million from December 31, 2016 and the outstanding unpaid principal balance of serviced mortgages was $3.7 billion as of September 30, 2016, an increase of $684.5 million from December 31, 2015.
Total expenses for the nine months ended September 30, 2017 were $79.6 million, an increase of $21.4 million from total expenses of $58.2 million for the nine months ended September 30, 2016.
Advertising expense, which consists of our marketing costs including television, internet, direct mail and other related expenses, increased to $15.3 million for the nine months ended September 30, 2017 from $7.5 million for the nine months ended September 30, 2016, primarily due to a $7.8 million increase in line with the direct-to-consumer growth plan and the response to the competitive environment due to shifts in consumer demand. We continually assess the effectiveness of our advertising initiatives and adjust the timing, investment and advertising channels on an ongoing basis.
Compensation and benefits expense increased to $38.1 million for the nine months ended September 30, 2017 from $34.6 million for the nine months ended September 30, 2016 primarily due to higher headcount and higher commissions resulting from a $131.7 million increase in closed loan production in the nine months ended September 30, 2017 compared to the comparable period in the prior year.
General and administrative expense increased to $6.0 million for the nine months ended September 30, 2017 from $5.7 million for the nine months ended September 30, 2016. The $0.3 million increase was primarily due to increases in rent expense associated with lease termination charges incurred during the three months ended September 30, 2017, and additional expenses incurred in connection with the Company's new leasing arrangement.
The provision for losses for the nine months ended September 30, 2017 decreased $0.5 million from the nine months ended September 30, 2016 primarily due to a decrease in delinquency rates in our servicing portfolio.
As noted above, during the third quarter of 2017, we performed an impairment analysis on the indefinite-lived and finite-lived intangible assets and goodwill of Home Lending reporting unit. As a result of the analysis, the Company recorded an $8.4 million goodwill impairment charge in the nine months ended September 30, 2017.

61

Reconciliation of our Segments' Net (Loss) Income to Net Loss Attributable to The J.G. Wentworth Company
The table below presents a reconciliation of the two reportable Segments' Net (loss) income to Net loss attributable to The J.G. Wentworth Company for the three and nine months ended September 30, 2017 and 2016.
 
 
Three Months Ended September 30,
 
2017 vs. 2016
 
Nine Months Ended September 30,
 
2017 vs. 2016
 
 
2017
 
2016
 
$ Change
 
% Change
 
2017
 
2016
 
$ Change
 
% Change
 
 
(In thousands)
Structured Settlements Segment
 
$
(1,800
)
 
$
(47,682
)
 
$
45,882

 
96.2
 %
 
$
(30,555
)
 
$
(119,257
)
 
$
88,702

 
74.4
 %
Home Lending Segment
 
(4,714
)
 
8,875

 
(13,589
)
 
(153.1
)
 
2,272

 
21,891

 
(19,619
)
 
(89.6
)
Net loss
 
$
(6,514
)
 
$
(38,807
)
 
$
32,293

 
83.2
 %
 
$
(28,283
)
 
$
(97,366
)
 
$
69,083

 
71.0
 %
Less: net loss attributable to non-controlling interests
 
(4,200
)
 
(20,094
)
 
15,894

 
79.1

 
(11,757
)
 
(51,773
)
 
40,016

 
77.3

Net loss attributable to The J.G. Wentworth Company
 
$
(2,314
)
 
$
(18,713
)
 
$
16,399

 
87.6
 %
 
$
(16,526
)
 
$
(45,593
)
 
$
29,067

 
63.8
 %
Liquidity and Capital Resources
For Structured Settlements, we generate cash by purchasing payment streams which we subsequently securitize, sell or otherwise finance in transactions that are structured to generate cash proceeds to us that exceed the purchase price we paid for those payment streams. These payment streams are generally structured settlements, annuities and lottery winnings. The securitization or sales of the purchased assets in Structured Settlements are normally structured with an "initial close" in which we issue the principal amount of securitized debt and receive: (i) cash in exchange for assets delivered and (ii) restricted cash in exchange for assets to be delivered 60 to 90 days in the future (referred to as the "pre-funding" date). On the pre-funding date, additional assets are delivered to the lenders in return for the lifting of restrictions on the restricted cash. As a result of structuring the securitizations in this fashion, our restricted cash balances have fluctuated significantly depending on the timing of the transactions' initial close and their associated pre-funding dates. We refer to each of these transactions as a monetization event. Historically, securitizations or direct asset sales have generally had two monetization events, but there are times when we opt not to have a pre-funding date, and instead only have a single monetization event, the initial close. In the nine months ended September 30, 2017, we completed five monetization events which consisted of: (i) one securitization for which the pre-funding was completed in 2017 associated with the 2016-1 securitization and (ii) two securitizations for which each had two monetization events. In the nine months ended September 30, 2016, we completed four monetization events which consisted of two direct asset sales which each had two monetization events.
In conjunction with the implementation of the credit risk retention rules mandated by The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), we expect the total net cash proceeds to be received by the Company for each securitization in the Structured Settlements segment to be less than would have been received absent the application of such rules.
For Home Lending, we generate cash by originating or purchasing mortgage loans and selling these loans to take-out investors or securitizing directly with Ginnie Mae, Fannie Mae or Freddie Mac, with servicing retained or released.
Cash Flows
The following table sets forth a summary of our cash flows for the nine months ended September 30, 2017 and 2016.
 
Nine Months Ended September 30,
 
2017
 
2016
 
(In thousands)
Net cash provided by operating activities
$
3,782

 
$
53,454

Net cash used in investing activities
(1,399
)
 
(8,384
)
Net cash used in financing activities
(27,657
)
 
(15,714
)
Net (decrease) increase in cash and cash equivalents
$
(25,274
)
 
$
29,356

Cash and cash equivalents at beginning of year
80,166

 
57,322

Cash and cash equivalents at end of period
$
54,892

 
$
86,678

Cash Flow from Operating Activities
Net cash provided by operating activities was $3.8 million for the nine months ended September 30, 2017 compared to $53.5 million for the nine months ended September 30, 2016. The $49.7 million decrease in the net cash provided by operating

62

activities was primarily due to a $256.3 million decrease in net proceeds from the sale of finance receivables. The decrease in cash provided by operating activities in the Structured Settlements segment were partially offset by (i) a $147.3 million net increase in cash provided by operating activities resulting from the Home Lending segment's originations and purchases of mortgages held for sale (net of proceeds from the sale of, and principal payments on, mortgage loans held for sale) and (ii) a $63.4 million change in restricted cash and investments as a result of the timing and structure of our monetization events. The other changes in net cash provided by operating activities are non-cash items, primarily consisting of the realized and unrealized gains (losses) on VIE and other finance receivables, long-term debt and derivatives, gain on sale of finance receivables, accretion of interest income and changes in our deferred income tax position.
Cash Flow from Investing Activities
Net cash used in investing activities was $1.4 million for the nine months ended September 30, 2017 compared to $8.4 million for the nine months ended September 30, 2016. The $7.0 million decrease in cash used in investing activities was due to the final $7.6 million purchase price payment we made to the former owners of the Home Lending segment during the nine months ended September 30, 2016, offset by a $0.6 million increase in purchases of premises and equipment, net of sales proceeds.
Cash Flow from Financing Activities 
Net cash used in financing activities was $27.7 million for the nine months ended September 30, 2017 compared to $15.7 million for the nine months ended September 30, 2016. The $12.0 million increase in net cash used in financing activities was primarily attributable to a $214.3 million increase in repayments (net of proceeds) of our revolving credit facilities, partially offset by a $139.7 million decrease in repayments of long-term debt and derivatives coupled with a $63.0 million increase in proceeds received from the issuance of VIE long-term debt resulting from our decision to securitize assets during the nine months ended September 30, 2017 as compared to completing a direct asset sale during the nine months ended September 30, 2016.
Funding Sources
We utilize several different funding sources to finance our segments and their associated business activities.
Structured Settlements Segment
Structured Settlements and Annuities
We finance our guaranteed structured settlement and annuity payment stream purchases with available cash and cash equivalents and/or through two separate warehouse facilities. As of September 30, 2017, these two warehouse facilities had $275.0 million of aggregate capacity which consisted of: (i) a $200.0 million warehouse facility with a revolving period that ends on November 30, 2017, with an amortization period of two months and (ii) a $75.0 million warehouse facility with a revolving period that ends on September 24, 2019, with an amortization period of 24 months. As of November 14, 2017, our borrowing facilities have an aggregate capacity of $275.0 million.
Our warehouse facilities are structured with advance rates that range from 92.5% to 95.5% and discount rates that range from 8.0% to 9.2%. The discount rate is either fixed over the term of the facility or is based on a fixed spread over a floating swap rate, which we then fix through interest rate swaps at the time of the borrowing. The discount rate is used to discount the payment streams we have purchased, and these discounted payment streams are then multiplied by the advance rate to determine the amount of funds that are available to us under the warehouse facilities.
These warehouse facilities are used strictly to fund the guaranteed structured settlement and annuity payment stream purchases. Our ability to fund current operations depends upon our ability to secure these types of short-term financings on acceptable terms and to renew or replace the financings as they expire. We regularly assess our warehouse facilities and adjust the nature and amount of our committed warehouse lines in light of market conditions. We intend to review, and then renew or replace the two guaranteed structured settlement and annuity warehouse facilities prior to the end of their respective revolving periods with amounts and terms to better reflect our financing needs in the future. While we historically have been able to regularly renew the warehouse facilities in the ordinary course of business, we cannot assure that we will be able to renew, replace or refinance our existing financing arrangements or enter into additional financing arrangements on terms that are commercially reasonable or at all. In addition, until the consummation and confirmation of the Plan (as further discussed under Going Concern and Consolidated Liquidity Considerations below), a negative ratings action by a rating agency, an adverse action by a regulatory authority or a general deterioration in the economy that constricts the availability of credit may increase our cost of funds and may impair our ability to renew existing facilities or obtain new financing facilities.
We have historically undertaken non-recourse term securitizations or direct asset sales once we have aggregated in our warehouse facilities a sufficient amount of structured settlement and annuity payment streams to undertake a securitization or asset sale. At the close of each such transaction, the outstanding amount under each of the warehouse facilities is repaid. The amount of net proceeds we receive from securitizations or direct asset sales is typically in excess of the amount of funds required to repay the warehouse facilities, resulting in a positive cash flow at the time of securitization. In the nine months ended September 30, 2017, we completed five monetization events which consisted of: (i) one securitization for which the pre-funding was completed

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in 2017 and (ii) two securitization for which both the initial close and pre-funding were completed. On January 20, 2017, we completed the pre-funding associated with the 2016-1 securitization which generated net proceeds to us of $15.9 million. On March 22, 2017, we completed the initial close associated with our 2017-1 securitization with an aggregate note issuance amount of $131.8 million and a deal discount rate of 4.35% which generated net proceeds to us of $15.1 million. On June 12, 2017, we completed the pre-funding for the 2017-1 securitization which generated net proceeds to us of $16.3 million. On August 9, 2017, we completed the initial close associated with our 2017-2 securitization with an aggregate note issuance amount of $144.2 million and a deal discount rate of 3.95% which generated net proceeds to us of $19.8 million. On September 29, 2017, we completed the pre-funding for the 2017-2 securitization which generated net proceeds to us of $28.5 million.
We intend, subject to market conditions, management discretion and other relevant factors, to undertake multiple securitizations or direct asset sales in the future. Although diversifying our financing strategy allows us to realize greater cost efficiencies in our capital market transactions and provides us with increased flexibility, we still believe the asset-backed securities market has been and continues to be the Company's principal market.
The counterparties to the structured settlement and annuity payment streams we purchase have mostly investment grade credit ratings. Approximately 74.0% of the counterparties to structured settlement payment streams that we purchased in 2017 were rated "A3" or better by Moody's. This reduced credit risk, together with the long weighted average life and low pre-payment risk, results in a desirable asset class that can be securitized and sold in the asset-backed security market or through outright-sale transactions.
Life Contingent Structured Settlements and Life Contingent Annuities
We finance our purchases of life contingent structured settlement and life contingent annuity payment streams through a committed permanent financing facility with a capacity of $100.0 million that can be increased at the lender's option by $50.0 million. This facility allows us to purchase life contingent structured settlement and life contingent annuity payment streams without assuming any mortality risk. This facility is structured as a permanent facility, whereby the life contingent structured settlement and life contingent annuity payment streams we purchase are financed for their entire life and remain within the facility until maturity. The payment streams purchased are funded at a fixed advance rate of 94%, while the discount rate used to value the payment streams is variable, depending on the characteristics of the payment streams. The life contingent structured settlement and life contingent annuity payment streams that we purchase are discounted at a higher rate than the discount rates applied to those payment streams under the committed permanent financing facility, with the result that the funds available to be drawn under the facility exceed the purchase price for the payment streams we purchase. This positive cash flow is used to support our business and cover a portion of our operating expenses. As of September 30, 2017, our permanent financing facility had $11.1 million of unused capacity for our life contingent annuity and structured settlement businesses.
Lotteries
In 2013, we began purchasing lottery payment streams and have structured one of our two remaining guaranteed structured settlement and annuity warehouse facilities to allow us to finance lottery payment streams. This allows us to aggregate a pool of such payment streams that we subsequently include with structured settlement and annuity payment streams in securitizations and direct asset sales. We intend to continue to include lottery payment streams in securitizations and direct asset sales in the future.
Pre-Settlement Funding
We previously financed our pre-settlement funding transactions through a revolving credit facility. The $35.0 million facility was structured with a revolving period that ended on December 31, 2015. The principal amount outstanding under the facility as of December 31, 2015 was converted into a "term advance" facility requiring minimum principal payments over the subsequent 24 month amortization period with interest payable monthly and calculated in the same manner as the original credit facility. In August 2016, the Company made principal payments to fully repay this term advance facility and then terminated the facility. The Company incurred less than $0.1 million in fees related to the termination.
We decided, beginning in April 2015, to curtail our purchases of pre-settlement transactions. We have, however, and will continue to broker leads for such transactions to third parties in exchange for broker or referral fees, and, in the normal course of our business, we will evaluate our existing pool of pre-settlement assets for retention or sale. Ceasing purchases of pre-settlement transactions has not had a material impact on our business, financial condition, results of operation or cash flows.
Credit Facility
We have (i) a widely syndicated senior secured term loan with a principal balance of $449.5 million as of September 30, 2017 which matures in February 2019, and (ii) a $20.0 million revolving commitment that matured on August 8, 2017, and was not renewed. At each interest reset date, we have the option to elect that the senior secured term loan be either a Eurodollar loan or a Base Rate loan. If a Eurodollar loan, interest accrues at either LIBOR or 1.0% (whichever is greater) plus a spread of 6.0%. If a Base Rate loan, interest accrues at prime or 2.0% (whichever is greater) plus a spread of 5.0%. The revolving commitment had

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the same interest rate terms as the senior secured term loan. There are no principal payments due on the senior secured term loan until its maturity in February 2019.
The Credit Facility required us, to the extent that as of the last day of any fiscal quarter there were outstanding balances on the revolving commitment that exceeded specific thresholds (generally 15% of the $20.0 million borrowing capacity, or $3.0 million), to comply with a maximum total leverage ratio. As of September 30, 2017, the maximum total leverage ratio is no longer applicable because the revolving commitment under the Credit Facility matured in August 2017 and was not renewed. As of December 31, 2016, there were no outstanding borrowings under the revolving commitment, and, as a result, the maximum total leverage ratio requirement was not applicable. Had the leverage ratio requirement been applicable as of December 31, 2016, we would not have satisfied the maximum total leverage ratio requirement and would have been required to repay the outstanding borrowings on the revolver in excess of the specified threshold.
As we previously disclosed in the Current Report on Form 8-K which we filed with the SEC on November 9, 2017, the Company and certain of its subsidiaries entered into a Restructuring Support Agreement with certain lenders and certain members of The J.G. Wentworth Company, LLC to support a comprehensive restructuring of the Company’s long-term debt and existing equity, which is expected to be effectuated through a pre-packaged Chapter 11 plan of reorganization. If the restructuring contemplated by the Restructuring Support Agreement is consummated, the existing Credit Facility with a total of $449.5 million will be extinguished, a new secured revolving credit facility between $65 million and $70 million will be available to the Company, the lenders under the Credit Facility will receive at least 95.5% of new equity of the Company in exchange for the extinguishment, and all existing equity interests of the Company would be canceled without recovery.
Securitization and Permanent Financing Debt, at Fair Value
We elected fair value treatment under ASC 825 to measure the VIE long-term debt issued by securitization and permanent financing trusts and related VIE finance receivables. We have determined that measurement of the VIE long-term debt issued by securitization and permanent financing trusts at fair value better correlates with the fair value of the VIE finance receivables held by SPEs, which are held to provide the cash flow for the note obligations. The debt issued by our VIE securitization and permanent financing trusts is recourse only to the respective entities that issued the debt and is non-recourse to the Company and its other subsidiaries. Certain of our subsidiaries continue to receive fees for servicing the securitized assets which are eliminated in consolidation. In addition, the risk to our non-SPE subsidiaries from SPE losses is limited to cash reserves, residual interest amounts and repurchases of structured settlement payment streams that are subsequently determined to be ineligible for inclusion in the securitization or permanent financing trusts.
On September 2, 2016, we issued $207.5 million in notes collateralized by the residual asset cash flows and reserve cash interests related to 36 VIE securitization entities, which generated $65.9 million in net cash proceeds. In March 2017, we issued $2.3 million in notes collateralized by the residual asset cash flows and reserve cash associated with one of our securitizations with an outstanding principal balance. We act as the servicer and/or the subservicer and principal and interest are paid monthly from the cash flows from these collateralized residual interests.
Other Financing
We maintain other permanent financing arrangements that have been used in the past for longer term funding purposes. Each of these arrangements has assets pledged as collateral, the cash flows from which are used to satisfy the loan obligations. These other financing arrangements are more fully described in Notes 12 and 13 in our Notes to the Condensed Consolidated Financial Statements (Unaudited) under "Part I, Item 1. Financial Statements" of this Quarterly Report on Form 10-Q.
Home Lending Segment
Mortgage Loans Held For Sale
We finance our mortgage loan origination activities primarily through three separate warehouse facilities that had an aggregate capacity of $290.0 million as of September 30, 2017. In October 2017, we increased the capacity of our $100.0 million warehouse line of credit to $150.0 million, and all other terms remain unchanged. On January 11, 2018, the capacity of the $95.0 million warehouse line of credit will revert to $70.0 million through its maturity date of November 15, 2018, and all other terms remain unchanged. As of November 14, 2017, our borrowing facilities have an aggregate capacity of $340.0 million. We regularly assess our warehouse facilities and adjust the amount and the terms of our committed warehouse lines in light of market conditions.
These credit facilities are generally renewed annually for a period of 12 months and represent secured lending facilities with our originated mortgage loans serving as collateral. In addition, our lenders require pledge fund deposits of approximately one percent of the facility's capacity be maintained with the lender. Without these facilities we would not be able to meet our short-term liquidity requirements to operate our Home Lending segment.
Our Home Lending segment typically holds its mortgage loan inventory for 30 to 45 days with these warehouse facilities until the loans are sold to take-out investors or securitized directly with Ginnie Mae, Fannie Mae or Freddie Mac, at which time the amount outstanding with the warehouse facilities are repaid.

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These warehouse facilities are used strictly to fund the origination of mortgage loans. Our ability to fund current operations depends upon our ability to secure these types of short-term financings on acceptable terms and to renew or replace the financings as they expire. These warehouse facilities are uncommitted and, at any given time, we may not be able to obtain additional financing under them when we need it, exposing us to, among other things, liquidity risks of the types described in "Part I. Item 1A. Risk Factors" of our Annual Report on Form 10-K. While we historically have been able to regularly renew the warehouse facilities in the ordinary course of business, we cannot assure that we will be able to renew, replace or refinance our existing financing arrangements or enter into additional financing arrangements on terms that are commercially reasonable or at all. In addition, until the consummation and confirmation of the Plan (as further discussed under Going Concern and Consolidated Liquidity Considerations below), a negative ratings action by a rating agency, an adverse action by a regulatory authority or a general deterioration in the economy that constricts the availability of credit may increase our cost of funds and may impair our ability to renew existing facilities or obtain new financing facilities.
Operating Line of Credit
We maintain a $10.0 million line of credit with a financial institution that is generally renewed annually for a period of 12 months and represents a secured lending facility with our MSRs serving as collateral. In August 2016, we increased the capacity of this line of credit to $10.0 million from $6.0 million and extended the maturity date to August 15, 2018. We may only draw on $4.0 million of the capacity until we receive regulatory approval, which is not expected prior to the current maturity date on August 15, 2018.
Going Concern and Consolidated Liquidity Considerations
In accordance with FASB Subtopic 205-40, management must evaluate whether there are conditions or events, considered in the aggregate, that could raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. In making its evaluation, management is not able to take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the financial statements are issued. However, when the relevant conditions or events, considered in the aggregate, initially indicate that substantial doubt may exist, management may consider in its evaluation whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.
As we disclosed in the Current Report on Form 8-K which we filed with the SEC on November 9, 2017 the Company Parties entered into the Restructuring Support Agreement with certain lenders and certain members of JGW LLC to support a comprehensive restructuring of the Company’s long-term debt and existing equity. The Restructuring is expected to be implemented through a pre-packaged Chapter 11 plan of reorganization pursuant to cases commenced under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The Company expects ordinary-course operations to continue substantially uninterrupted during and after the Chapter 11 Cases. The Restructuring Support Agreement may be terminated upon the occurrence of certain events, including, amongst others, the failure to meet specified milestones relating to filing of the Chapter 11 Cases and confirmation and consummation of the Plan, as well as in the event of certain breaches by the parties under the Restructuring Support Agreement. The Restructuring Support Agreement is subject to termination if the effective date of the Plan has not occurred within 21 days after entry by the Bankruptcy Court of an order confirming the Plan. The Plan is expected to be subject to certain conditions, including the obtaining of certain regulatory and third party approvals.

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In evaluating our ability to continue as a going concern, management considered the conditions and events, including the above factors, that could raise substantial doubt about our ability to continue as a going concern within one year after the date that our condensed consolidated financial statements are issued, November 14, 2017. There are certain material conditions we must satisfy under the Restructuring Support Agreement, including timely meeting specified milestones related to the solicitation of votes to approve the Plan, commencement of the Chapter 11 Cases, confirmation of the Plan, and consummation of the Plan. Our ability to timely complete such milestones is subject to risks and uncertainties, many of which are beyond our control. Based on this assessment, management has concluded that the Company’s entry into the Restructuring Support Agreement, which will be effectuated through a pre-packaged Chapter 11 plan of reorganization, raises substantial doubt about the Company’s ability to continue as a going concern, which will not be alleviated until the Company emerges from the Chapter 11 Cases which is anticipated in or about January 2018. However, success of the Restructuring and the emergence from the Chapter 11 Cases is dependent on the approval of the Bankruptcy Court and other factors and, as a result, there can be no assurances it will be consummated in accordance with this anticipated timing or at all. However, the Company expects ordinary-course operations to continue substantially uninterrupted during and after emergence from the Chapter 11 Cases.
Notwithstanding the above, only Orchard Acquisition Company, LLC ("OAC") and certain of its direct and indirect parent companies, including the Corporation and JGW LLC are anticipated to file for Chapter 11 Cases. Accordingly, OAC’s direct and indirect subsidiaries, including the entities which conduct all of the Company’s consolidated operations, are not anticipated to file any Chapter 11 Cases. A Revolving Credit Facility (“New RCF”), in an aggregate amount of at least $65.0 million but no more than $70.0 million, will be available to the Company from HPS Investment Partners, LLC. The New RCF will mature four years from the date of emergence from bankruptcy with interest payable at a rate of LIBOR plus 5.00% per annum on drawn amounts and 3.00% per annum on undrawn amounts. On the effective date of the Restructuring, all claims arising under the Credit Agreement and related guarantees will be terminated and released, and each Term Lender will receive its pro rata share of (i) cash consideration in an amount equal to the lesser of (a) $45 million and (b) the aggregate amount such that at least $50 million of pro forma liquidity will be maintained on the Company’s consolidated balance sheet on the Effective Date from immediately available funds from both cash on hand and draws from the New RCF. The Company will borrow funds from the New RCF to fund the fees and expenses of the Restructuring, which are estimated to be $8.9 million and are subject to change depending on the timing of emergence from Chapter 11 Cases. The New RCF will allow the Company to operate its business, significantly reduce the Company’s current interest expense under our existing Credit Agreement, in a manner expected to generate and maintain sufficient cash flows to fund the Company’s operations and meet all expected liabilities and obligations, including interest payments under the New RCF.
In addition, under the terms of the Restructuring, all existing TRA claims under our Tax Receivable Agreement will be canceled. In conjunction with this cancellation, each holder of TRA claims will receive its pro rata share, as compared to all holders of TRA claims, in the form of cash or equity or a mix of cash and equity at the sole election of each such holder of TRA claims.
The success of the Restructuring will depend on approval by the Bankruptcy Court and the willingness of existing debt and security holders to agree to the exchange or modification of their interests as outlined in the Plan. While we anticipate having sufficient liquidity from these sources of funding to fund our operations and consummate the Restructuring, there can be no assurances to that effect.
Contractual Obligations and Commitments
Information regarding our contractual obligations and commitments appears in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2016 and is incorporated herein by reference. There have been no material changes in those contractual obligations and commitments, except as described below:
On May 18, 2017, we, through our subsidiary Green Apple Management Company, LLC, entered into an office lease with The GC Net Lease (Wayne) Investors, LLC. A copy of the lease agreement was filed as Exhibit 99.1 on Form 8-K filed with the SEC on May 19, 2017. The office is located at 1200 Morris Drive, Chesterbrook, Pennsylvania. The initial lease period under the agreement runs until June 30, 2028 and requires monthly payments in the amounts of $0.1 million starting January 2018 and increasing to $0.2 million in June 2018.
Critical Accounting Policies
In establishing accounting policies within the framework of U.S. GAAP, management must make certain assessments, estimates, and choices that will result in the application of these principals in a manner that appropriately reflects our financial condition and results of operations. Critical accounting policies are those policies that we believe present the most complex or subjective measurements and have the most potential to affect our financial position and operating results. While all decisions regarding accounting policies are important, there are certain accounting policies and estimates that we consider to be critical.
A discussion of these critical accounting policies is located in the section titled "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies" in our Annual Report on Form

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10-K. There have been no material changes in the our critical accounting policies, judgments and estimates, including assumptions or estimation techniques utilized, as compared to our most recent Annual Report on Form 10-K. 
Emerging Growth Company
We qualify as an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). As a result, we are permitted to, and may opt to, rely on exemptions from certain financial disclosure requirements under U.S. GAAP that are not applicable to other companies that are not emerging growth companies. We have taken advantage of the benefits of this extended transition period. As a result, our financial statements may not be comparable to other companies that do not rely on such exemptions from financial disclosure requirements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued Accounting Standard Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which relates to how an entity recognizes the revenue it expects to be entitled to for the transfer of promised goods and services to customers. Since May 2014, the FASB issued amendments to this standard (ASU Nos. 2016-8, 2016-10, 2016-11, 2016-12, 2016-20 and 2017-13), which provide further clarification regarding this standard. ASU 2014-09 will replace certain existing revenue recognition guidance when it becomes effective. The original effective date of the guidance was deferred in August 2015 by the issuance of ASU No. 2015-14 and is effective for public entities in the fiscal year beginning after December 15, 2017, including interim reporting periods within that reporting period, and for all other entities in the fiscal year beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. Management has commenced its implementation activities and determined that the following revenue streams are not impacted by or are excluded from the scope of this ASU: a) interest income, b) realized and unrealized gains on VIE and other finance receivables, long-term debt and derivatives, c) realized and unrealized gains on sale of mortgage loans held for sale, net of direct costs, d) changes in mortgage servicing rights, net, e) loan servicing fees, and f) realized and unrealized gains (losses) on marketable securities, net. Management is continuing to evaluate the impact of the future adoption of this ASU on our consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis, which requires an entity to re-evaluate its consolidation for limited partnerships or similar entities. This ASU requires an entity to apply this amendment using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the period of adoption. This ASU changes the criteria that an entity uses to identify a variable interest entity, how it characterizes the VIE for a limited partnership or similar entity and how it determines the primary beneficiary. For public entities, this ASU is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years, and for nonpublic entities for fiscal years beginning after December 15, 2016 and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements. In October 2016, the FASB issued ASU No. 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control, which further clarified ASU No. 2015-02. This update amends the consolidation guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The amendments in this ASU are effective for public entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. Entities that have not yet adopted the amendments in ASU No. 2015-02 are required to adopt the amendments in ASU 2016-17 at the same time they adopt the amendments in ASU No. 2015-02 and should apply the same transition method elected for the application of ASU No. 2015-02. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements and whether we will apply the retrospective or the modified-retrospective approach upon adoption.
In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement Period Adjustments, which relates to how and when the acquiring entity recognizes adjustments to provisional amounts that are identified during the measurement period. This ASU eliminates the requirement to retrospectively account for these adjustments to their respective provisional amount with a corresponding adjustment to goodwill. This ASU becomes effective for public entities in the fiscal year beginning after December 15, 2015 and for non-public entities in the fiscal year beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Management does not believe this ASU will have a material impact on our consolidated financial statements upon adoption.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which requires an entity to classify deferred tax liabilities and assets as noncurrent in the classified statement of financial position. This ASU becomes effective for public entities for annual periods beginning after December 15, 2016 and for all other entities for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early

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adoption is permitted. Management does not believe this ASU will have a material impact on our consolidated financial statements upon adoption.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity's accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. This ASU also amends certain disclosure requirements associated with the fair value of financial instruments. This ASU becomes effective for public entities in the fiscal year beginning after December 15, 2017 and for all other entities beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to recognize right-of-use assets and lease liabilities, for all leases, with the exception of short-term leases, at the commencement date of each lease. Under the new guidance, lessor accounting is largely unchanged. This ASU is effective for all entities for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. The amendments of this update should be applied using a modified retrospective approach, which requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products, which addresses the current and potential future diversity in practice related to the de-recognition of a prepaid stored-value product liability. This ASU becomes effective for public entities in the fiscal year beginning after December 15, 2017 and for non-public entities in the fiscal year beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-06, Contingent Put and Call Options in Debt Instruments, which addresses diversity in practice in assessing embedded contingent call or put options in debt instruments. This ASU becomes effective for public entities in the fiscal year beginning after December 15, 2016 and for non-public entities in the fiscal year beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted. This ASU should be applied using a modified retrospective approach to existing debt instruments as of the beginning of the fiscal year for which this ASU is effective. Management does not believe this ASU will have a material impact on our consolidated financial statements upon adoption.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU becomes effective for public entities in the fiscal year beginning after December 15, 2016 and for non-public entities in the fiscal year beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). This ASU was issued to provide more decision-useful information about the expected credit losses on financial instruments and changes the loss impairment methodology. This ASU is effective for all entities for reporting periods beginning after December 15, 2019 using a modified retrospective adoption method. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). This ASU was issued to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This ASU becomes effective for public entities in the fiscal year beginning after December 15, 2017 and interim periods within those fiscal years and for non-public entities in the fiscal year beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-entity transfers of Assets Other than Inventory. This ASU removes the current exception in U.S. GAAP prohibiting entities from recognizing current and deferred income tax expenses or benefits related to transfer of assets, other than inventory, within the consolidated entity. The current exception to defer the recognition of any tax impact on the transfer of inventory within the consolidated entity until it is sold to a third party remains unaffected. This ASU is effective for public entities for annual reporting periods beginning after December

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15, 2017 and for all other entities for annual periods beginning after December 15, 2018 and interim reporting periods within annual periods beginning after December 15, 2019. Early adoption is permitted and should be in the first interim period if an entity issues interim financial statements. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 320): Restricted Cash. This ASU clarifies the presentation of restricted cash in the statement of cash flows as it will be included with cash and cash equivalents, which eliminates diversity in practice. This ASU becomes effective for public entities in the fiscal year beginning after December 15, 2017 and interim periods within those fiscal years and for all other entities in the fiscal year beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU clarifies the definition of a business, which consists of inputs and processes applied to those inputs that have the ability to contribute to the creation of outputs. This ASU provides a framework to evaluate when an input and a substantive process are present and narrows the definition of the term outputs to be consistent with how it is described in Topic 606, Revenue from Contracts with Customers. When substantially all of the fair value of gross assets acquired is concentrated in a single asset, the assets acquired would not represent a business. This ASU introduces an initial required screen that, if met, eliminates the need for further assessment. This ASU is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within those periods and for all other entities for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. This ASU is intended to provide clarity in relation to the disclosure of the impact that ASU Nos. 2014-09, 2016-02 and 2016-13 will have on our financial statements when adopted. The effective date for this guidance is the same as the effective dates for ASU Nos. 2014-09, 2016-02 and 2016-13. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which provides clarity of when an entity has changes to the term or conditions of a share-based payment award, and when an entity should apply modification accounting. This ASU becomes effective for all entities for annual periods, and interim periods, within those annual periods, beginning after December 15, 2017. Early adoption is permitted. Management is currently evaluating the impact of the future adoption of this ASU on our consolidated financial statements.
Item 3.   Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Market risk is the potential for loss or diminished financial performance arising from adverse changes in market forces, including interest rates and market prices. Market risk sensitivity is the degree to which a financial instrument, or a company that owns financial instruments, is exposed to market forces. Fluctuations in interest rates, changes in economic conditions, shifts in customer behavior and other factors can affect our financial performance. Changes in economic conditions and shifts in customer behavior are difficult to predict, and our financial performance cannot be completely insulated from these forces.

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Structured Settlements Segment
Interest Rate Risk
We are exposed to interest rate risk on all assets and liabilities held at fair value with all gains and losses recorded in our condensed consolidated statements of operations. As of September 30, 2017, the sensitivities of our exposed assets and liabilities to a hypothetical change in interest rates of 100 basis points are as follows:
 
Balance as of September 30, 2017
 
Impact as of September 30, 2017 of a 100 basis point increase in interest rates
 
Impact as of September 30, 2017 of a 100 basis point decrease in interest rates
 
(In thousands)
Securitized receivables, at fair value
$
4,325,032

 
$
(275,131
)
 
$
302,967

Unsecuritized finance receivables, at fair value
26,111

 
(2,788
)
 
3,318

VIE and other finance receivables, at fair value
4,351,143

 
(277,919
)
 
306,285

VIE long-term debt issued by securitization and permanent financing trusts, at fair value
(4,200,824
)
 
251,420

 
(283,515
)
VIE derivative liabilities, at fair value
(43,494
)
 
15,850

 
(17,292
)
Net impact
N/A

 
$
(10,649
)
 
$
5,478

These sensitivities are hypothetical and should be used with caution. The impact of rate changes on securitized receivables is largely offset by the corresponding impact on securitization debt and associated VIE derivative liabilities.
In addition to the impact to our consolidated balance sheet noted above from changes in interest rates, the level of interest rates and our resulting financing costs are a key determinant in the amount of income that we generate from our inventory of structured settlement, annuity and lottery payment streams. If interest rates change between the time that we price a transaction with a customer and when it is ultimately securitized or sold, our profitability on the transaction is impacted. For example, if the cost of our financing were to have increased by 1% for all of the structured settlement payment streams we purchased during the nine months ended September 30, 2017, and we were unable to mitigate the impact of this increase by hedging with interest rate swaps or other means, our loss for the nine months ended September 30, 2017 would have been increased by approximately $10.4 million. If instead this increase of 1% in financing costs were to have only affected our September structured settlement payment stream purchases, our loss for the nine months ended September 30, 2017 would have been increased by approximately $1.2 million.
Home Lending Segment
Interest Rate Risk
Changes in interest rates affect our operations primarily as follows:
• an increase in interest rates would increase our costs of servicing our outstanding debt, including our ability to finance servicing advances and loan originations;
• a decrease (increase) in interest rates would generally increase (decrease) prepayment rates and may require us to report a decrease (increase) in the value of our MSRs;
• a change in prevailing interest rates could impact our earnings from our custodial deposit accounts;
• an increase in interest rates could generate an increase in delinquency, default and foreclosure rates resulting in an increase in both operating expenses and interest expense and could cause a reduction in the value of our assets; and
• a substantial and sustained increase in prevailing interest rates could adversely affect our loan originations volume because refinancing an existing loan would be less attractive and qualifying for a loan may be more difficult.
We actively manage the risk profiles of IRLCs and mortgage loans held for sale on a daily basis and enter into forward sales of MBS in an amount equal to the portion of the IRLCs expected to close, assuming no change in mortgage interest rates. In addition, to manage the interest rate risk associated with mortgage loans held for sale, we enter into forward sales of MBS to deliver mortgage loan inventory to investors.
Sensitivity Analysis
We assess our market risk based on changes in interest rates utilizing a sensitivity analysis. The sensitivity analysis measures the potential impact on fair values based on hypothetical changes (increases and decreases) in interest rates.

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We use a duration-based model in determining the impact of interest rate shifts on our loan portfolio, certain other interest-bearing liabilities measured at fair value and interest rate derivatives portfolios. The primary assumption used in these models is that an increase or decrease in the benchmark interest rate produces a parallel shift in the yield curve across all maturities.
We utilize a discounted cash flow analysis to determine the fair value of MSRs and the impact of parallel interest rate shifts on MSRs. The primary assumptions in this model are prepayment speeds and market discount rates. However, this analysis ignores the impact of interest rate changes on certain material variables, such as the benefit or detriment on the value of future loan originations, non-parallel shifts in the spread relationships between MBS, swaps and U.S. Treasury rates and changes in primary and secondary mortgage market spreads. For mortgage loans, IRLCs and forward delivery commitments on MBS, we rely on a model in determining the impact of interest rate shifts. In addition, for IRLCs, the borrower's propensity to close their mortgage loans under the commitment is used as a primary assumption.
Our total market risk is influenced by a wide variety of factors including market volatility and the liquidity of the markets. There are certain limitations inherent in the sensitivity analysis presented, including the necessity to conduct the analysis based on a single point in time and the inability to include the complex market reactions that normally would arise from the market shifts modeled.
The following sensitivity analyses are limited in that they were performed at a particular point in time, only contemplate the movement of interest rates and do not incorporate changes to other variables, are subject to the accuracy of various models and assumptions used and do not incorporate other factors that would affect our overall financial performance in such scenarios, including operational adjustments made by management to account for changing circumstances. For these reasons, the following estimates should not be viewed as earnings forecasts.
As of September 30, 2017, the sensitivities of our exposed assets and liabilities to a hypothetical change in interest rates of 100 basis points are as follows:
 
 
Balance as of September 30, 2017
 
Impact as of September 30, 2017 of a 100 basis point increase in interest rates
 
Impact as of September 30, 2017 of a 100 basis point decrease in interest rates
 
 
(In thousands)
Mortgage loans held for sale, at fair value
 
$
239,477

 
$
(14,336
)
 
$
9,078

Mortgage servicing rights, at fair value
 
50,018

 
4,710

 
(12,157
)
Interest rate lock commitments, at fair value
 
16,268

 
(23,233
)
 
7,557

Forward sale commitments, at fair value
 
1,848

 
38,882

 
(17,038
)
Net impact
 
N/A

 
$
6,023

 
$
(12,560
)
Consumer Credit Risk
We sell our mortgage loans on a non-recourse basis. We also provide representations and warranties to purchasers and insurers of the mortgage loans sold that typically are in place for the life of the loan. In the event of a breach of these representations and warranties, we may be required to purchase a mortgage loan or indemnify the purchaser, and any subsequent loss on the mortgage loan may be borne by us. If there is no breach of a representation and warranty provision, we have no obligation to repurchase the loan or indemnify the investor against loss. The outstanding unpaid principal balance of mortgage loans sold by us represents the maximum potential exposure related to representation and warranty provisions.
We maintain a reserve for losses on mortgage loans repurchased or indemnified as a result of breaches of representations and warranties on our sold loans. Our estimate is based on our most recent data regarding loan repurchases and indemnity payments, actual credit losses on repurchased loans and recovery history, among other factors. Our assumptions are affected by factors both internal and external in nature. Internal factors include, among other things, level of loan sales, as well as to whom the loans are sold, the expectation of credit loss on repurchases and indemnifications, our success rate at appealing repurchase demands and our ability to recover any losses from third parties. External factors that may affect our estimate include, among other things, the overall economic condition in the housing market, the economic condition of borrowers, the political environment at investor agencies and the overall U.S. and world economy. Many of the factors are beyond our control and may lead to judgments that are susceptible to change.
Counterparty Credit Risk
We are exposed to counterparty credit risk in the event of non-performance by counterparties to various agreements. We monitor the credit ratings of our counterparties and do not anticipate losses due to counterparty non-performance.

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Derivatives and Other Hedging Instruments
Refer to Note 14, Derivative Financial Instruments, in the Notes to the Condensed Consolidated Financial Statements (Unaudited) under "Part I, Item 1. Financial Statements," which is incorporated by reference herein, for a summary of the Company's derivative transactions.
Item 4.   Controls and Procedures
Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate controls over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our management, with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer each concluded that, as of the end of such period, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported on a timely basis, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
Our management, including our principal executive officer and principal financial officer, conducted an evaluation of any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter. Based on that evaluation, our principal executive officer and principal financial officer concluded that there has not been any change in our internal control over financial reporting during that quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Information regarding our legal proceedings appears in "Part I, Item 3. Legal Proceedings" in our Annual Report on Form 10-K for the year ended December 31, 2016 and is incorporated herein by reference. There have been no material developments to any of our current legal proceedings described in our Annual Report on Form 10-K (as updated by our Quarterly Report on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017), except as noted below.
On February 10, 2015, a competitor filed, in the United States District Court for the Central District of California, Western Division, a complaint alleging that the Company and certain of its affiliates have violated antitrust laws as a result of the 2011 merger between J.G. Wentworth, LLC and Peach Holdings Inc. and post-merger activities, and requested that the court find that there has been a Section 7 violation of the Clayton Act, assets are to be divested, an injunction should be issued and monetary damages should be awarded. After allowing the plaintiff two attempts to amend its original complaint to sustain a viable claim, on February 1, 2016, the court granted our motion to dismiss, with prejudice, and on February 10, 2016, the court entered a judgment accordingly. On February 26, 2016, the plaintiff filed a notice of appeal with the United States Court of Appeals for the Ninth Circuit; No. 16-55289 (D.C. No. 2:15-cv-00954-BRO-PJW). The parties completed their briefing on the appeal, and oral argument on the plaintiff’s appeal was conducted on October 3, 2017. On October 19, 2017, the United States Court of Appeals for the Ninth Circuit affirmed the District Court's decision.
On August 3, 2016, Rockpoint Funding, LLC and Rockpoint Strategies, LLC (collectively, the "Plaintiffs") filed in the Superior Court of the State of California for the County of Los Angeles - Central District, Case No.: BC629359, an action against The J.G. Wentworth Company, Green Apple Management Company, LLC, PeachOne Funding SPV, LLC, Peachtree Funding Northeast, LLC and Peachtree Pre-Settlement Funding, LLC (collectively, the "Defendants"). The complaint alleges that the Defendants breached an asset purchase agreement among the parties. Plaintiffs are seeking compensatory damages, attorney's fees, costs and punitive damages. On September 28, 2016, the Defendants filed a demurrer to the allegations and supporting memorandum of points and authorities. On October 13, 2016, the Plaintiffs filed an opposition to the demurrer, and on October 19, 2016, the Defendants filed a reply. On October 26, 2016, the court held a hearing on the demurrer and issued a tentative ruling that granted the demurrer on various counts and overruled the demurrer on others. The court took the matter under advisement after the oral argument and, on November 1, 2016, adopted its tentative ruling as final. The Plaintiffs filed their first amended complaint on December 14, 2016 making similar allegations and adding items believed to be sufficient to sustain their claims. The Defendants then filed a demurrer to the first amended complaint, the Plaintiffs responded and the Defendants filed their associated reply. On February 27, 2017 the court issued its tentative ruling on the demurrer, sustaining the demurrer as relating to the claims for breach of contract, duty of good faith/fair dealing and promissory estoppel, without further leave to amend the complaint, and overruling the demurrer on the breach of duty to negotiate in good faith and negligent misrepresentation claims. The Plaintiffs requested a hearing on the tentative ruling which was held on April 5, 2017. After the hearing, the court adopted its tentative ruling making it final. Thereafter, the Defendants filed an answer denying the Plaintiffs' remaining claims. The parties updated the court that they were working toward a mutually agreeable settlement of the open claims, and asked the court for extensions of certain deadlines. The court granted the request and the trial on the matter that was tentatively scheduled for December 4, 2017 was postponed. In the interim, the parties continued their settlement negotiations and ultimately agreed on mutually agreeable terms of settlement. On October 31, 2017, the parties executed settlement documentation and the matter was dismissed with prejudice.
Item 1A. Risk Factors
Information regarding our risk factors appears in "Part I, Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016 (as updated by our Quarterly Report on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017), and such information is incorporated herein by reference. There have been no material developments to the risk factors described in our Annual Report on Form 10-K, except as noted below.
We have entered into a restructuring support agreement (the “Restructuring Support Agreement”) and plan to restructure certain of our outstanding indebtedness under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) to address our liquidity, capital structure, and debt service obligations.
As of September 30, 2017, we had $449.5 million of total indebtedness (not including indebtedness related to our warehouse facilities, other borrowings under revolving credit facilities and other similar borrowings and asset-backed securitizations, which indebtedness is recourse only to the VIE assets on our balance sheet) that matures in February 2019. We anticipate that we will not be able refinance this indebtedness when it matures.
Accordingly, on November 9, 2017, we entered into the Restructuring Support Agreement with lenders holding in excess of 87% of our senior secured term loans (the “Consenting Lenders”) and certain members of The J.G. Wentworth Company, LLC (the “Consenting Members”). The Restructuring Support Agreement, a copy of which was filed as Exhibit 10.1 on Form 8-K filed with the SEC on November 9, 2017, sets forth, subject to certain conditions, the commitment of the Company, the Consenting

74

Lenders and the Consenting Members to support a comprehensive restructuring of our long-term debt and existing equity (the “Restructuring”) and a timeline and process for its implementation including obtaining certain regulatory and third party approvals. The Restructuring is expected to be effectuated through a pre-packaged chapter 11 plan of reorganization (as may be amended, restated, supplemented, otherwise modified from time to time, the “Plan”) pursuant to the Chapter 11 Cases to be commenced under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court).
There can be no assurances that we will be able to successfully consummate the Plan, restructure under Chapter 11, or realize all or any of the expected benefits from the Restructuring.
We plan to seek the protection of the Bankruptcy Court, which subjects us to the risks and uncertainties associated with Chapter 11 proceedings and may harm our business and place our equity holders at significant risk of losing all of their investment in the Company.
For the duration of our bankruptcy proceedings, our operations and ability to develop and execute our business plan, and our ability to continue as a going concern, will be subject to the risks and uncertainties associated with bankruptcy. As such, seeking Bankruptcy Court protection could have a material adverse effect on our business, financial condition, results of operations and liquidity. So long as the Chapter 11 Cases continue, our senior management will be required to spend a significant amount of time and effort attending to the reorganization instead of focusing exclusively on our business operations. Bankruptcy Court protection also might make it more difficult to retain management, including Stewart A. Stockdale, our Chief Executive Officer, and other employees necessary to the success and growth of our business. Other significant risks related to our commencement of the Chapter 11 Cases include the following: 
•
our ability to prosecute, confirm and consummate a plan of reorganization with respect to the Chapter 11 Cases;
•
the high costs of bankruptcy and related fees;
•
our ability to obtain sufficient financing to operate and execute our business plan while the Chapter 11 Cases are ongoing;
•
our ability to maintain our relationships with our customers, employees, and other third parties;
•
our ability to maintain contracts that are critical to our operations;
•
our ability to obtain sufficient financing to allow us to emerge from bankruptcy and execute our business plan post-emergence; and
•
the actions and decisions of our debt holders and other third parties who have interests in the Chapter 11 Cases that may be inconsistent with our plans.
Delays in the Chapter 11 Cases increase the risks of our being unable to reorganize our business and emerge from bankruptcy and increase our costs associated with the bankruptcy process. 
The Restructuring Support Agreement contemplates the confirmation of the Plan through an orderly prepackaged bankruptcy case, but there can be no assurance that we will be able to implement such a Plan. In order for any proposed plan of reorganization to be confirmed, the Bankruptcy Code, in addition to other legal requirements, requires that at least one impaired class of creditors votes to accept the plan of reorganization. In order for a class to approve a plan of reorganization, approval of over one-half in number of creditors and at least two-thirds in claim amount by those who vote in each impaired class of creditors are required. In addition to obtaining the required votes, the requirements for a Bankruptcy Court to approve a plan of reorganization include, among other judicial findings, that we acted in accordance with the applicable provisions of the Bankruptcy Code and the plan of reorganization has been proposed in good faith and not by any means forbidden by law.
In the event at least one class of impaired creditors or interest holders does not vote to accept the plan of reorganization, we would have to satisfy the “cram down” requirements of the Bankruptcy Code and show that the plan of reorganization does not unfairly discriminate and is fair and equitable with respect to those classes of claims and interests that did not vote to accept the plan of reorganization.
     We may not be able to obtain approval of a disclosure statement and/or the required votes or the required judicial approval to the proposed plan of reorganization promptly, if at all. In such event, a prolonged Chapter 11 bankruptcy proceeding could adversely affect our relationships with customers and employees, among other parties, which in turn could adversely affect our business, competitive position, financial condition, liquidity and results of operations and our ability to continue as a going concern. A weakening of our financial condition, liquidity and results of operations could adversely affect our ability to implement the proposed Plan. In addition, if the Plan is not confirmed by the Bankruptcy Court, we may be forced to liquidate our assets.
Once our bankruptcy proceeding is commenced, it is also possible that the Bankruptcy Court may dismiss the proceeding or otherwise decide to abstain from hearing it on procedural grounds. In addition, the confirmation and effectiveness of the Plan

75

is subject to certain conditions and requirements in addition to those described above that may not be satisfied, and the Bankruptcy Court may conclude that the requirements for confirmation and effectiveness have not been satisfied.
 
Under the proposed Plan, all existing equity interests of our common stockholders will be canceled and our common stockholders will lose the full amount of their investment in the Company.
We have a significant amount of total indebtedness that is senior to our existing common stock in our capital structure. The Plan contemplated by the Restructuring Support Agreement provides, among other things, that upon our emergence from our Chapter 11 Cases, all shares of our existing common stock will be canceled and holders of our existing common stock will not be entitled to receive any recovery. Should the Plan in its current form be confirmed by the Bankruptcy Court, holders of our common stock would lose the full amount of their investment in the Company. Accordingly, any trading in shares of our common stock during the pendency of the Chapter 11 proceedings is highly speculative and any acquisition of our common stock during this period may result in a complete loss of your investment.
The Restructuring Support Agreement is subject to significant conditions and milestones that may be difficult for us to satisfy.
There are certain material conditions we must satisfy under the Restructuring Support Agreement, including timely meeting specified milestones related to the solicitation of votes to approve the Plan, commencement of the Chapter 11 Cases, confirmation of the Plan, and consummation of the Plan. Our ability to timely complete such milestones is subject to risks and uncertainties, many of which are beyond our control.
We may not be able to obtain confirmation of the Plan.
     There can be no assurance that the Plan as outlined in the Restructuring Support Agreement (or any other plan of reorganization) will be approved by the Bankruptcy Court. The success of any reorganization will depend on approval by the Bankruptcy Court and the willingness of existing debt and security holders to agree to the exchange or modification of their interests as outlined in the Plan, and there can be no guarantee of success with respect to the Plan or any other plan of reorganization. For instance, we might receive objections to confirmation of the Plan from various stakeholders in the Chapter 11 Cases. We cannot predict the impact that any objection might have on the Plan or on a Bankruptcy Court’s decision to confirm the Plan. Any objection may cause us to devote significant resources in response which could materially and adversely affect our business, financial condition and results of operations. If the Plan is not confirmed by the Bankruptcy Court, it is unclear whether we would be able to reorganize our business and what, if any, distributions holders of claims against us, including holders of our secured and unsecured debt and equity, would ultimately receive with respect to their claims.
There can be no assurance as to whether we will be able to obtain confirmation of the Plan, successfully reorganize and emerge from the Chapter 11 Cases or, if we do obtain confirmation of the Plan and successfully reorganize, as to when we would emerge from the Chapter 11 Cases. If we are unable to gain confirmation of the Plan and successfully reorganize, we may not be able to continue our operations.
We may not have adequate liquidity to operate our business.
We have historically relied on the following methods to fund the different segments of our business: (i) our guaranteed structured settlement and annuity payment stream purchases have been funded with available cash and cash equivalents and/or through two separate warehouse facilities, which, as of November 14, 2017, had an aggregate capacity of $275.0 million, (ii) our purchases of life contingent structured settlement and life contingent annuity payment streams have been funded through a committed permanent financing facility with a capacity of $100.0 million that can be increased at the lender’s option by $50.0 million, (iii) our purchases of lottery payment streams have been funded by using one of our two remaining guaranteed structured settlement and annuity warehouse facilities to finance those streams, (iv) our mortgage loan origination activities have been funded primarily through three separate warehouse facilities that had an aggregate capacity of $340.0 million as of November 14, 2017. In addition, we have a widely syndicated senior secured term loan with a principal balance of $449.5 million as of September 30, 2017 which matures in February 2019. Under the terms of the Restructuring Support Agreement, the Company will borrow funds from HPS Investment Partners, LLC and/or its affiliates, affiliated or managed funds, separately managed accounts and co-investors under a new revolving credit facility in an aggregate amount of at least $65 million, but no more than $70 million, to fund the fees and expenses of the Restructuring.
While we anticipate having sufficient liquidity from these sources of funding to fund our operations and consummate the Restructuring, there can be no assurances to that effect. In addition, there can be no assurance that we will be able to maintain sufficient liquidity or access other sources of liquidity when needed in the future.
 The pursuit of the Chapter 11 Cases has consumed, and will continue to consume, a substantial portion of the time and attention of our management, which may have an adverse effect on our business and results of operations, and we may face increased levels of employee attrition.

76

Leading up to and following commencement of the Chapter 11 Cases contemplated by the Restructuring Support Agreement, our management will be required to spend a significant amount of time and effort focusing on the Chapter 11 Cases. This diversion of attention may materially adversely affect the conduct of our business, and, as a result, our financial condition and results of operations, particularly if the Chapter 11 Cases are protracted.
During the pendency of the Chapter 11 Cases, our management and employees will face considerable distraction and uncertainty and we may experience increased levels of employee attrition. A loss of key personnel or material erosion of employee morale could have a materially adverse effect on our ability to meet customer expectations, thereby adversely affecting our business and results of operations. Our ability to engage, motivate and retain key employees or take other measures intended to motivate and retain key employees to remain with us through the pendency of the Chapter 11 Cases is limited by restrictions on implementation of incentive programs under the Bankruptcy Code.
The loss of services of members of our management team and the failure to retain or attract members of our management team, including Stewart A. Stockdale, our Chief Executive Officer, and other key personnel, could impair our ability to execute our strategy and implement operational initiatives, which would likely have a material adverse effect on our business, financial condition and results of operations.
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
There was no share repurchase activity by the Company during the three months ended September 30, 2017.
Item 3.   Defaults Upon Senior Securities
Not applicable.
Item 4.   Mine Safety Disclosures
Not applicable.
Item 5.   Other Information
Not applicable.
Item 6.   Exhibits
Exhibit No.
 
Description
Exhibit 10.1
 
Restructuring Support Agreement, dated as of November 9, 2017, by and among the Company Parties and the supporting parties thereto. Filed as an exhibit to The J.G. Wentworth Company’s Current Report on Form 8-K (File No. 001-36170), filed with the SEC on November 9, 2017, and incorporated herein by reference.
Exhibit 31.1
 
Chief Executive Officer — Certification pursuant to Rule 13a-14(a).
Exhibit 31.2
 
Chief Financial Officer — Certification pursuant to Rule 13a-14(a).
Exhibit 32.1
 
Chief Executive Officer — Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
Exhibit 32.2
 
Chief Financial Officer — Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
101.INS
 
XBRL Instant Document.
101.SCH
 
XBRL Taxonomy Extension Schema Document.
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
 
XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.

77

SIGNATURES 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
THE J.G. WENTWORTH COMPANY
 
 
 
 
 
November 14, 2017
By:
/s/ Stewart A. Stockdale
 
 
Stewart A. Stockdale
 
 
Chief Executive Officer and Director
 
 
 
 
 
 
November 14, 2017
By:
/s/ Aikaterini Cozza
 
 
Aikaterini Cozza
 
 
Interim Chief Financial Officer

78

EXHIBIT INDEX
Exhibit No.
 
Description
Exhibit 10.1
 
Restructuring Support Agreement, dated as of November 9, 2017, by and among the Company Parties and the supporting parties thereto. Filed as an exhibit to The J.G. Wentworth Company’s Current Report on Form 8-K (File No. 001-36170), filed with the SEC on November 9, 2017, and incorporated herein by reference.
Exhibit 31.1
 
Chief Executive Officer — Certification pursuant to Rule 13a-14(a).
Exhibit 31.2
 
Chief Financial Officer — Certification pursuant to Rule 13a-14(a).
Exhibit 32.1
 
Chief Executive Officer — Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
Exhibit 32.2
 
Chief Financial Officer — Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
101.INS
 
XBRL Instant Document.
101.SCH
 
XBRL Taxonomy Extension Schema Document.
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
 
XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.


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