Note 9—FAIR VALUE MEASUREMENTS

The following tables present assets and liabilities that are measured at fair value on a recurring basis at June 30, 2013 and December 31, 2012.

	June 30,		Fair Value Measurement Levels at June 30, 2013
(in thousands)	2013		Level 1		Level 2		Level 3
Assets:
Bonds available-for-sale	$	896,322	$	-	$	-	$	896,322

Liabilities:
Derivative liabilities	$	2,698	$	-	$	2,004	$	694

	December 31,		Fair Value Measurement Levels at December 31, 2012
(in thousands)	2012		Level 1		Level 2		Level 3
Assets:
Bonds available-for-sale	$	969,394	$	-	$	-	$	969,394

Liabilities:
Derivative liabilities	$	3,544	$	-	$	2,477	$	1,067

The following table presents activity for assets and liabilities measured at fair value on a recurring basis using Level 3 inputs for the three months ended June 30, 2013.

(in thousands)	Bonds Available- for-sale		Derivative Liabilities
Balance, April 1, 2013	$	968,814	$	(1,006)
Net losses included in earnings		(1,417)		312
Net losses included in other comprehensive income ⁽¹⁾		(22,298)		-
Impact from sales/redemptions		(1,638)		-
Bonds eliminated due to real estate consolidation and foreclosure		(45,106)		-
Impact from settlements		(2,033)		-
Balance, June 30, 2013	$	896,322	$	(694)

⁽¹⁾

This amount includes $22.4 million of unrealized net holding losses arising during the period, which is then reduced by $0.5 million of unrealized bond losses reclassified into operations. This amount is then increased by $0.4 million of unrealized gains related to bonds that were redeemed.

The following table provides the amount included in earnings related to the activity presented in the table above, as well as additional realized (losses) gains recognized at bond sale or redemption and derivative settlement for the three months ended June 30, 2013.

(in thousands)	Net (losses) gains on bonds⁽¹⁾		Equity in Losses from Lower Tier Property Partnerships		Net losses on derivatives
Change in realized gains related to assets and liabilities held at April 1, 2013, but settled during the second quarter of 2013	$	-	$	-	$	-
Change in unrealized losses related to assets and liabilities still held at June 30, 2013		(480)		(937)		312
Additional realized gains (losses) recognized		416		-		(76)
Total (losses) gains reported in earnings	$	(64)	$	(937)	$	236

⁽¹⁾

Amounts are reflected through “Impairment on bonds” and “Net gains (losses) on assets and derivatives” on the consolidated statements of operations.

The following table presents activity for assets and liabilities measured at fair value on a recurring basis using Level 3 inputs for the three months ended June 30, 2012.

(in thousands)	Bonds Available- for-sale		Derivative Liabilities
Balance, April 1, 2012	$	1,016,442	$	(1,045)
Net losses included in earnings		(1,752)		(147)
Net gains included in other comprehensive income ⁽¹⁾		9,505		-
Impact from purchases		5,600		-
Impact from sales		(8,172)		-
Bonds eliminated due to real estate consolidation and foreclosure		(12,562)		-
Impact from settlements		(2,522)		-
Balance, June 30, 2012	$	1,006,539	$	(1,192)

⁽¹⁾

This amount includes $8.7 million of unrealized net holding gains arising during the period, which is then increased by $0.8 million of unrealized bond losses reclassified into operations.

(in thousands)	Net losses on bonds ⁽¹⁾		Equity in Losses from Lower Tier Property Partnerships		Net losses on derivatives
Change in realized gains related to assets and liabilities held at April 1, 2012, but settled during the second quarter of 2012	$	-	$	-	$	-
Change in unrealized losses related to assets and liabilities still held at June 30, 2012		(849)		(903)		(147)
Additional realized gains (losses) recognized		52		-		(75)
Total losses reported in earnings	$	(797)	$	(903)	$	(222)

⁽¹⁾

Amounts are reflected through “Impairment on bonds” and “Net gains (losses) on assets and derivatives” on the consolidated statements of operations.

The following table presents activity for assets and liabilities measured at fair value on a recurring basis using Level 3 inputs for the six months ended June 30, 2013.

(in thousands)	Bonds Available- for-sale		Derivative Liabilities
Balance, January 1, 2013	$	969,394	$	(1,067)
Net losses included in earnings		(3,268)		227
Net losses included in other comprehensive income ⁽¹⁾		(11,299)		-
Impact from sales/redemptions		(6,033)		-
Bonds eliminated due to real estate consolidation and foreclosure		(45,106)		-
Impact from settlements		(7,366)		146
Balance, June 30, 2013	$	896,322	$	(694)

⁽¹⁾

This amount includes $11.5 million of unrealized net holding losses arising during the period, which is then reduced by $0.8 million of unrealized bond losses reclassified into operations. This amount is then increased by $0.6 million of unrealized gains related to bonds that were redeemed.

(in thousands)	Net (losses) gains on bonds ⁽¹⁾		Equity in Losses from Lower Tier Property Partnerships		Net losses on derivatives
Change in realized gains related to assets and liabilities held at January 1, 2013, but settled during the first six months of 2013	$	-	$	-	$	-
Change in unrealized losses related to assets and liabilities still held at June 30, 2013		(833)		(2,435)		227
Additional realized gains (losses) recognized		598		-		(153)
Total (losses) gains reported in earnings	$	(235)	$	(2,435)	$	74

⁽¹⁾

Amounts are reflected through “Impairment on bonds” and “Net gains (losses) on assets and derivatives” on the consolidated statements of operations.

The following table presents activity for assets and liabilities measured at fair value on a recurring basis using Level 3 inputs for the six months ended June 30, 2012.

(in thousands)	Bonds Available- for-sale		Derivative Liabilities
Balance, January 1, 2012	$	1,021,628	$	(558)
Net losses included in earnings		(3,024)		(153)
Net gains included in other comprehensive income ⁽¹⁾		16,720		-
Impact from purchases		6,189		-
Impact from sales		(8,172)		-
Bonds eliminated due to real estate consolidation and foreclosure		(12,562)		-
Impact from settlements		(14,240)		128
Transfer into Level 3		-		(609)
Balance, June 30, 2012	$	1,006,539	$	(1,192)

⁽¹⁾

This amount includes $15.7 million of unrealized net holding gains arising during the period, which is then increased by $1.0 million of unrealized bond losses reclassified into operations.

(in thousands)	Net losses on bonds ⁽¹⁾		Equity in Losses from Lower Tier Property Partnerships		Net losses on derivatives
Change in realized gains related to assets and liabilities held at January 1, 2012, but settled during the first six months of 2012	$	-	$	-	$	-
Change in unrealized losses related to assets and liabilities still held at June 30, 2012		(1,087)		(1,937)		(153)
Additional realized gains (losses) recognized		52		-		(152)
Total losses reported in earnings	$	(1,035)	$	(1,937)	$	(305)

⁽¹⁾

Amounts are reflected through “Impairment on bonds” and “Net gains (losses) on assets and derivatives” on the consolidated statements of operations.

The following methods or assumptions were used to estimate the fair value of these recurring financial instruments:

Bonds Available-for-sale – For most of our performing bonds, the Company estimates fair value using a discounted cash flow methodology; specifically, the Company discounts contractual principal and interest payments, adjusted for expected prepayments. The discount rate for each bond is based on expected investor yield requirements adjusted for bond attributes such as the expected term of the bond, debt service coverage ratios, geographic location and bond size. The weighted average discount rate for the performing bond portfolio was 6.34% and 6.29% at June 30, 2013 and December 31, 2012, respectively. The discount rate of 6.34% was used to set the valuation of the bonds included in the Company’s sale of its common shares in TEB on July 3, 2013. See Note 18, “Subsequent Events” for more information. If observable market quotes are available, the Company will estimate the fair value based on such quoted prices. For non-performing bonds, the Company estimates fair value by discounting the property’s expected cash flows and residual proceeds using estimated market discount and capitalization rates, less estimated selling costs. The discount rate averaged 8.3% at June 30, 2013 and December 31, 2012. The capitalization rate averaged 7.0% at June 30, 2013 and December 31, 2012. However, to the extent available, the Company may estimate fair value based on a sale agreement, a letter of intent to purchase, an appraisal or other indications of fair value as available.

The discount rates and capitalization rates as discussed above are significant inputs to bond valuations and are unobservable in the market. To the extent discount rates and capitalization rates were to increase (decrease) in isolation the corresponding estimated bond values would decrease (increase).

Derivative Financial Instruments – The fair value of derivatives was based on dealer quotes, where available, or estimated using valuation models incorporating current market assumptions. The Company’s interest rate swap agreements have collateral posting requirements that are considered in determining the fair value of these instruments.

The following table presents assets that were measured at fair value in 2013 on a non-recurring basis and still held at June 30, 2013.

	June 30,		Fair Value Measurement Levels at June 30, 2013							Total Gains Reported for the Three Months Ended		Total Gains Reported for the Six Months Ended
(in thousands)	2013			Level 1		Level 2		Level 3		June 30, 2013:		June 30, 2013:
Assets:
Loans receivable	$	45		$	-	$	-	$	45	$	40	$	66

The following table presents assets that were measured at fair value in 2012 on a non-recurring basis and still held at December 31, 2012.

	December 31,		Fair Value Measurement Levels at December 31, 2012						Total Gains (Losses) Reported for the Three Months Ended		Total Gains Reported for the Six Months
(in thousands)	2012		Level 1		Level 2		Level 3		June 30, 2012:		Ended June 30, 2012:
Assets:
Loans receivable	$	93	$	-	$	-	$	93	$	113	$	72
Investment in an unconsolidated venture		6,266		-		-		6,266		(4)		3

The following methods or assumptions were used to estimate the fair value of these nonrecurring financial and non-financial instruments:

Loans Receivable – For non-performing loans, given that the Company has the right to foreclose on the underlying real estate which is collateral for the loan, the Company estimates the fair value by using an estimate of sales price, if available, less estimated selling costs. Estimates of sales prices are derived from a number of sources including current bids, appraisals or other indications of fair value as available. If the sales price is not readily estimable from such sources, as well as for all performing loans, the Company estimates fair value by discounting the expected cash flows using current market yields for similar loans. Loans receivable is recorded through “Other assets.”

Investment in an unconsolidated venture – This is the Company’s 33.3% interest in an investment in a real estate partnership that was formed to take a deed-in-lieu of foreclosure on land that was collateral for a loan held by the Company. This investment is valued based on a third party appraisal.