Note 9—FAIR VALUE MEASUREMENTS

Recurring Valuations

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

			Fair Value Measurement Levels at September 30, 2013
(in thousands)	September 30, 2013		Level 1		Level 2		Level 3
Assets:
Bonds available-for-sale	$	196,485	$	–	$	–	$	196,485

Liabilities:
Derivative liabilities	$	662	$	–	$	–	$	662

			Fair Value Measurement Levels at December 31, 2012
(in thousands)	December 31, 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 September 30, 2013.

(in thousands)	Bonds Available- for-sale		Derivative Liabilities
Balance, July 1, 2013	$	896,322	$	(694)
Net losses included in earnings		(1,321)		32
Net losses included in other comprehensive income ⁽¹⁾		(80,682)		–
Impact from sales/redemptions		(606,121)		–
Bonds eliminated due to real estate consolidation and foreclosure		(10,168)		–
Impact from settlements		(1,545)		–
Balance, September 30, 2013	$	196,485	$	(662)

⁽¹⁾ This amount includes $5.2 million of unrealized net holding losses arising during the period, which is then reduced by $0.9 million of unrealized bond losses reclassified into operations. This amount is then increased by $76.4 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 September 30, 2013.

(in thousands)	Net gains on bonds ⁽¹⁾		Equity in Losses from Lower Tier Property Partnerships		Net losses on derivatives ⁽²⁾
Change in realized gains related to assets and liabilities held at July 1, 2013, but settled during the third quarter of 2013	$	–	$	–	$	–
Change in unrealized losses related to assets and liabilities still held at September 30, 2013		(939)		(382)		32
Additional realized gains (losses) recognized		76,362		-		(77)
Total gains (losses) reported in earnings	$	75,423	$	(382)	$	(45)

⁽¹⁾ Amounts are reflected through “Impairment on bonds” and “Net gains (losses) on assets and derivatives” on the consolidated statements of operations.

⁽²⁾ Amounts are reflected through “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 September 30, 2012.

(in thousands)	Bonds Available- for-sale		Derivative Liabilities
Balance, July 1, 2012	$	1,006,539	$	(1,192)
Net losses included in earnings		(3,373)		(27)
Net gains included in other comprehensive income ⁽¹⁾		15,085		–
Impact from purchases		–		–
Impact from sales		–		–
Bonds eliminated due to real estate consolidation and foreclosure		(21,545)		–
Impact from settlements		(2,419)		–
Balance, September 30, 2012	$	994,287	$	(1,219)

⁽¹⁾ This amount includes $12.8 million of unrealized net holding gains arising during the period, which is then increased by $2.3 million of unrealized bond losses reclassified into operations.

The following table provides the amount included in earnings related to the activity presented in the table above, as well as additional realized losses recognized at bond sale or redemption and derivative settlement for the three months ended September 30, 2012.

(in thousands)	Net losses on bonds ⁽¹⁾		Equity in Losses from Lower Tier Property Partnerships		Net losses on derivatives ⁽²⁾
Change in realized gains related to assets and liabilities held at July 1, 2012, but settled during the third quarter of 2012	$	–	$	–	$	–
Change in unrealized losses related to assets and liabilities still held at September 30, 2012		(2,282)		(1,091)		(27)
Additional realized gains (losses) recognized		2		–		(76)
Total losses reported in earnings	$	(2,280)	$	(1,091)	$	(103)

⁽¹⁾ Amounts are reflected through “Impairment on bonds” and “Net gains (losses) on assets and derivatives” on the consolidated statements of operations.

⁽²⁾ Amounts are reflected through “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 nine months ended September 30, 2013.

(in thousands)	Bonds Available- for-sale		Derivative Liabilities
Balance, January 1, 2013	$	969,394	$	(1,067)
Net losses included in earnings		(4,589)		259
Net losses included in other comprehensive income ⁽¹⁾		(91,980)		–
Impact from sales/redemptions		(612,154)		–
Bonds eliminated due to real estate consolidation and foreclosure		(55,275)		–
Impact from settlements		(8,911)		146
Balance, September 30, 2013	$	196,485	$	(662)

⁽¹⁾ This amount includes $16.8 million of unrealized net holding losses arising during the period, which is then reduced by $1.8 million of unrealized bond losses reclassified into operations. This amount is then increased by $77.0 million of unrealized gains related to bonds that were redeemed

(in thousands)	Net gains on bonds ⁽¹⁾		Equity in Losses from Lower Tier Property Partnerships		Net losses on derivatives ⁽²⁾
Change in realized gains related to assets and liabilities held at January 1, 2013, but settled during the first nine months of 2013	$	(530)	$	–	$	–
Change in unrealized losses related to assets and liabilities still held at September 30, 2013		(1,242)		(2,817)		259
Additional realized gains (losses) recognized		76,960		–		(230)
Total gains (losses) reported in earnings	$	75,188	$	(2,817)	$	29

⁽¹⁾ Amounts are reflected through “Impairment on bonds” and “Net gains (losses) on assets and derivatives” on the consolidated statements of operations.

⁽²⁾ Amounts are reflected through “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 nine months ended September 30, 2012.

(in thousands)	Bonds Available- for-sale		Derivative Liabilities
Balance, January 1, 2012	$	1,021,628	$	(1,167)
Net losses included in earnings		(6,397)		429
Net gains included in other comprehensive income ⁽¹⁾		31,806		–
Impact from purchases		6,189		–
Impact from sales		(8,172)		–
Bonds eliminated due to real estate consolidation and foreclosure		(34,108)		–
Impact from settlements		(16,659)		128
Transfer into Level 3		–		(609)
Balance, September 30, 2012	$	994,287	$	(1,219)

⁽¹⁾ This amount includes $28.4 million of unrealized net holding gains arising during the period, which is then increased by $3.4 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 ⁽²⁾
Change in realized gains related to assets and liabilities held at January 1, 2012, but settled during the first nine months of 2012	$	–	$	–	$	–
Change in unrealized losses related to assets and liabilities still held at September 30, 2012		(3,369)		(3,028)		(180)
Additional realized gains (losses) recognized		54		–		(228)
Total losses reported in earnings	$	(3,315)	$	(3,028)	$	(408)

⁽¹⁾ Amounts are reflected through “Impairment on bonds” and “Net gains (losses) on assets and derivatives” on the consolidated statements of operations.

⁽²⁾ Amounts are reflected through “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 7.36% and 7.45% at September 30, 2013 and December 31, 2012, respectively for performing bonds still held in the portfolio at September 30, 2013. If observable market quotes are available, the Company will estimate the fair value based on such quoted prices.

For non-performing bonds and certain currently performing bonds where payment of full principal and interest is uncertain, 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 8.6% and 8.2% at September 30, 2013 and December 31, 2012, respectively for these bonds still in the portfolio at September 30, 2013. The capitalization rate averaged 6.6% and 6.9% at September 30, 2013 and December 31, 2012, respectively, for these bonds still in the portfolio at September 30, 2013. 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 – At September 30, 2013, the Company had one interest rate swap contract. This contract was valued using an internal valuation model, taking into consideration credit risk.

Non-recurring Valuations

At year-end 2012 and September 30, 2013, the only non-recurring instruments were certain loans held-for-sale; however, the Company’s loan portfolio at each period-end was de minimis.