Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2016

Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

We evaluate our financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them for each reporting period. Due to the lack of transparency and quantity of transactions related to trades of servicing rights of comparable loans, we utilize an income valuation technique to estimate fair value. We utilize industry-standard modeling, such as discounted cash flow models, to arrive at an estimate of fair value and may utilize third-party service providers to assist in the valuation process. This determination requires significant judgments to be made.

The following tables present information about our assets that are measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015 (in thousands):



	June 30, 2016
Description	Level 1		Level 2		Level 3		Total
Assets:
Servicing assets	$	—	$	—	$	1,989	$	1,989
Total assets	$	—	$	—	$	1,989	$	1,989



	December 31, 2015
Description	Level 1		Level 2		Level 3		Total
Assets:
Servicing assets	$	—	$	—	$	3,489	$	3,489
Total assets	$	—	$	—	$	3,489	$	3,489

There were no transfers between levels during the six months ended June 30, 2016 or the year ended December 31, 2015.

The following tables present quantitative information about the significant unobservable inputs used for certain of our Level 3 fair value measurement as of June 30, 2016 and December 31, 2015:



		June 30, 2016
	Unobservable input	Minimum		Maximum		Weighted-Average
Servicing Assets	Discount rate	30.00	%	30.00	%	30.00	%
	Cost of service ⁽¹⁾	0.08	%	0.13	%	0.10	%
	Renewal rate	42.50	%	57.78	%	50.80	%
	Default rate	10.35	%	10.87	%	10.63	%



		December 31, 2015
	Unobservable input	Minimum		Maximum		Weighted-Average
Servicing Assets	Discount rate	30.00	%	30.00	%	30.00	%
	Cost of service ⁽¹⁾	0.09	%	0.09	%	0.09	%
	Renewal rate	31.78	%	53.21	%	53.21	%
	Default rate	6.43	%	10.36	%	10.00	%
⁽¹⁾Estimated cost of servicing a loan as a percentage of unpaid principal balance

Changes in certain of the unobservable inputs noted above may have a significant impact on the fair value of our servicing asset. The following table summarizes the effect adverse changes in estimate would have on the fair value of the servicing assets as of June 30, 2016 and December 31, 2015 given hypothetical changes in default rate and cost to service (in thousands):



	June 30, 2016			December 31, 2015
	Servicing Assets
Default rate assumption:
Default rate increase of 25%	$	(100	)	$	(145	)
Default rate increase of 50%	$	(192	)	$	(282	)
Cost to service assumption:
Cost to service increase by 25%	$	(55	)	$	(79	)
Cost to service increase by 50%	$	(110	)	$	(159	)

Assets and Liabilities Disclosed at Fair Value

Because our loans held for investment, loans held for sale and fixed-rate debt are not measured at fair value, we are required to disclose their fair value in accordance with ASC 825. We utilize industry-standard modeling, such as discounted cash flow models, to arrive at an estimate of fair value and may utilize third-party service providers to assist in the valuation process. This determination requires significant judgments to be made.



	June 30, 2016
Description	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets:
Loans held for investment	$	730,549	$	793,219	$	—	$	—	$	793,219
Loans held for sale	3,837		3,997		—		—		3,997
Total assets	$	734,386	$	797,216	$	—	$	—	$	797,216

Description
Liabilities:
Fixed-rate debt	$	263,193	$	252,561	$	—	$	—	$	252,561
Total fixed-rate debt	$	263,193	$	252,561	$	—	$	—	$	252,561



	December 31, 2015
Description	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Assets:
Loans held for investment	$	499,431	$	545,740	$	—	$	—	$	545,740
Loans held for sale	706		763		—		—		763
Total assets	$	500,137	$	546,503	$	—	$	—	$	546,503

Description
Liabilities:
Fixed-rate debt	$	194,624	$	190,411	$	—	$	—	$	190,411
Total fixed-rate debt	$	194,624	$	190,411	$	—	$	—	$	190,411

The following techniques and assumptions are used in estimating fair value:

Loans held for investment and loans held for sale - Fair value is based on discounted cash flow models which contain certain unobservable inputs such as discount rate, renewal rate and default rate.

Fixed-rate debt - Our ODAST Agreement, ODAST II Agreement, SBAF Agreement and Partner Synthetic Participations are considered fixed-rate debt. Fair value of our fixed-rate debt is based on a discounted cash flow model with the discount rate being an unobservable input. On May 17, 2016, we voluntarily prepaid in full all amounts due under the ODAST Agreement and simultaneously entered into the ODAST II Agreement.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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