NOTE 13 — FAIR VALUE MEASUREMENTS

FASB Accounting Standards Codification (“ASC”) 825, Financial Instruments, requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. FASB ASC 820, Fair Value Measurements (“ASC 820”) defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

•

Level 1 – Quoted prices in active markets for identical assets or liabilities.

•

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Fair Value Estimates of Financial Instruments

The following tables present the carrying values and fair value estimates of financial instruments as of June 30, 2013 and December 31, 2012:


		June 30, 2013
(Dollars in thousands)	Fair Value Hierarchy	Carrying Amount		Estimated Fair Value
ASSETS
Continuing operations:
Cash and cash equivalents	Level 1	$	76,190	$	76,190
Loans receivable, net	Level 3		3,735		4,203
Preferred stock (other assets)	Level 3		800		3,000
Common stock (other assets)	Level 3		1,940		1,940
Discontinued operations:
Cash and cash equivalents	Level 1	$	116	$	116
FHLB stock	Level 1		2,051		2,051
Commercial real estate investments, net:
CRA Investment - nonmarketable equity securities	Level 1		32		1,035
CRA Investment - commercial loan participation interest	Level 3		19		19
LIABILITIES
Continuing operations:
Lines of credit	Level 3	$	4,250	$	4,250
Long-term debt:
Notes Payable	Level 1		37,246		35,477
Term loan	Level 3		6,300		6,300
Seller notes	Level 3		1,750		1,750
Common stock warrant liability	Level 3		7,500		7,500


		December 31, 2012
(Dollars in thousands)	Fair Value Hierarchy	Carrying Amount		Estimated Fair Value
ASSETS
Continuing operations:
Cash and cash equivalents	Level 1	$	53,699	$	53,699
Investment securities, available for sale	Level 1		3,060		3,060
Loans receivable, net	Level 3		24,372		24,850
Preferred stock (other assets)	Level 3		800		2,000
Common stock (other assets)	Level 3		1,940		1,940
Discontinued operations:
Cash and cash equivalents	Level 1	$	162	$	162
FHLB stock	Level 1		2,051		2,051
Commercial real estate investments, net	Level 3		51		51
LIABILITIES
Continuing operations:
Lines of credit	Level 3	$	1,000	$	1,000
Long-term debt:
Notes Payable	Level 1		37,246		34,732
Term loan	Level 3		6,900		6,900
Seller notes	Level 3		2,906		2,906
Common stock warrant liability	Level 3		2,350		2,350

The Company used the following methods and assumptions to estimate the fair value of each class of financial instrument at June 30, 2013 and December 31, 2012:

Cash and cash equivalents

Cash and cash equivalents are recorded at historical cost. The carrying value is a reasonable estimate of fair value as these instruments have short-term maturities and market interest rates.

Investment securities, available for sale

Investment securities, available for sale were comprised of corporate bonds until the bonds were liquidated in March 2013. Estimated fair values for investment securities, available for sale are based on quoted market prices, where available.

Loans receivable, net

Loans receivable, net, consists of residential real estate loans, which were sold in the second quarter of 2013, commercial real estate loans, commercial lines of credit and commercial term notes. The estimated fair values of commercial real estate loans and commercial lines of credit consider the collateral coverage of assets securing the loans and estimated credit losses, as well as variable interest rates, which approximate market interest rates.

The estimated fair value of the residential real estate loans is based on several factors, including current bids and market indications for similar assets, recent sales, discounted cash flow analyses, estimated values of underlying collateral and actual loss severity experience in portfolios backed by similar assets.

The estimated fair value of the commercial term note is based on a discounted cash flow analysis, which includes assumptions about the amount and timing of expected future cash flows, discounted at rates that reflect the inherent credit, liquidity and uncertainty risks associated with the underlying borrower.

Preferred stock

Preferred stock is classified in other noncurrent assets and consists of 4.00% cumulative convertible preferred stock of a privately held commercial loan borrower of Signature Special Situations. The preferred stock has a stated value of $2.0 million and is convertible to 45.0% of the common stock of the company, on a fully diluted basis. The estimated fair value of preferred stock is based on estimates of EBITDA, a sales multiple and a control discount.

Common stock

Common stock is classified in other noncurrent assets and consists of securities the Company received in exchange for its position in a privately held company’s defaulted corporate bonds pursuant to the issuer’s plan of reorganization in bankruptcy. As of June 30, 2013, there was no readily determinable fair value for the common stock. The estimated fair value of common stock is based on the results of operations of the issuer since emerging from bankruptcy, including EBITDA and a sales multiple.

FHLB stock

Federal Home Loan Bank (“FHLB”) stock is classified in assets of discontinued operations and recorded at cost. FIL was previously a member of the FHLB of San Francisco and, accordingly, was required to purchase stock in order to maintain a borrowing relationship. The Company can redeem the FHLB stock at par value five years after the surrender of FIL’s bank charter, and on July 25, 2013, the Company redeemed the FHLB stock and received $2.1 million in cash.

Commercial real estate investments, net

Commercial real estate investments, net is classified in assets of discontinued operations and includes participations in community development projects and similar types of loans and investments that FIL previously maintained for compliance under the Community Reinvestment Act (“CRA”). The fair value of commercial real estate investments is based on various factors including current bids and market indications of similar assets, recent sales and discounted cash flow analyses. At June 30, 2013, the estimated fair value is based on the public announcement of a tender offer for a company in which FIL held an investment. Prior to the announcement, there were limited divestiture options for the investment.

Lines of credit

Lines of credit are short-term borrowing facilities, used primarily to support ongoing operations. The carrying value is a reasonable estimate of fair value, as these instruments have short-term maturities and market interest rates.

Long-term debt

Long-term debt includes Notes Payable, term loan and seller notes. The fair value of Notes Payable is based on quoted market prices. The fair value of the term loan is based on the market characteristics of the loan terms, including a variable interest rate, principal amortization and maturity date, generally consistent with market terms. The fair value of the seller notes is based on the market characteristics of the loan terms, scheduled and accelerated principal amortization and maturity date, generally consistent with market terms.

Common stock warrant liability

Common stock warrant liability is a derivative liability related to the Warrants that provide for anti-dilution and pricing protection provisions. The fair value of the common stock warrant liability is based on a trinomial lattice option pricing model that utilizes various assumptions, including exercise multiple, volatility and expected term.

Recurring and Nonrecurring Fair Value Measurements

In accordance with GAAP, certain assets and liabilities are required to be carried at estimated fair value and are referred to as recurring fair value measurements. From time to time, the Company is required to measure other assets and liabilities at estimated fair value, typically from the application of specific accounting guidance under GAAP and are referred to as nonrecurring fair value measurements. These adjustments to fair value generally result from the application of lower of cost or market accounting or impairment charges of individual assets. The following table presents the Company’s assets and liabilities measured at estimated fair value based on the fair value hierarchy on a recurring and nonrecurring basis:


(Dollars in thousands)	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Recurring fair value measurements:
June 30, 2013
Liabilities:
Common stock warrant liability	$	—	$	—	$	7,500	$	7,500
December 31, 2012
Assets:
Investment securities, available for sale	$	3,060	$	—	$	—	$	3,060
Liabilities:
Common stock warrant liability	$	—	$	—	$	2,350	$	2,350
Nonrecurring fair value measurements:
June 30, 2013
Assets:
Real estate owned, net (discontinued operations)	$	—	$	—	$	95	$	95
December 31, 2012
Assets:
Real estate owned, net (discontinued operations)	$	—	$	—	$	830	$	830
Commercial real estate investments, net		—		—		51		51

The following table presents a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2013 and 2012:


(Dollars in thousands)	Beginning Balance		Income (Expense) Realized in Earnings			Transfers In/Out of Level 3		Purchases		Issuances		Settlements		Ending Balance
Three Months Ended June 30, 2013
Common stock warrant liability	$	3,800	$	(3,700	)	$	—	$	—	$	—	$	—	$	7,500
Three Months Ended June 30, 2012
Contingent consideration	$	3,671	$	(75	)	$	—	$	—	$	—	$	—	$	3,746
Common stock warrant liability		1,400		(600	)		—		—		—		—		2,000
Six Months Ended June 30, 2013
Common stock warrant liability	$	2,350	$	(5,150	)	$	—	$	—	$	—	$	—	$	7,500
Six Months Ended June 30, 2012
Contingent consideration	$	3,597	$	(149	)	$	—	$	—	$	—	$	—	$	3,746
Common stock warrant liability		1,403		(597	)		—		—		—		—		2,000

The following table summarizes the total gains (losses) on assets and liabilities recorded on a nonrecurring basis for the periods indicated:


	Three Months Ended June 30,					Six Months Ended June 30,
(Dollars in thousands)	2013		2012			2013			2012
Loans held for sale, net⁽¹⁾ :
Continuing operations	$	—	$	—		$	—		$	2,776
Discontinued operations		—		14			—			(1,062	)
Real estate owned, net		—		(275	)		(283	)		(689	)
Commercial real estate investments, net		—		—			—			(121	)

	$	—	$	(261	)	$	(283	)	$	904

⁽¹⁾

Loans held for sale, net were measured at fair value as of March 31, 2012, however, they do not appear in the table presenting financial and nonfinancial assets and liabilities measured using nonrecurring fair value measurements at June 30, 2013 and December 31, 2012 above, as there were no loans classified as held for sale as of those dates.

The Company’s Level 3 assets and liabilities are determined using valuation techniques that incorporate unobservable inputs that require significant judgment or estimation. The following tables presents quantitative information about the valuation techniques and unobservable inputs applied to Level 3 fair value measurements as of June 30, 2013 and December 31, 2012:

(Dollars in thousands)

Estimated Fair Value
June 30, 2013

Valuation Technique

Unobservable Input

Range (Weighted Average)

Assets:

Real estate owned, net

Market approach

Marketability discounts

20.0% (20.0

(discontinued operations)

Estimated selling costs

8.0% (8.0

Liabilities:

Common stock warrant liability

7,500

Lattice option
pricing model

Exercise multiple
Volatility

Expected term

2.8x (2.8x

53.0% (53.0

5.1 - 5.3 years (5.2 years

)

(Dollars in thousands)

Estimated Fair Value
December 31, 2012

Valuation Technique

Unobservable Input

Range (Weighted Average)

Assets:

Real estate owned, net
(discontinued operations)

830

Market approach

Marketability discounts

Estimated selling costs

20.0% (20.0

8.0% (8.0

Commercial real estate investments
(discontinued operations)

Market approach

Marketability discounts

Control Discount

60.0% - 90.0% (85.0

25.0% (25.0

Liabilities:

Common stock warrant liability

2,350

Lattice option pricing model

Exercise multiple

Volatility

Expected term

2.8x (2.8x

51.0% (51.0

7.1 - 7.2 years (7.1 years

)

Significant unobservable inputs used in the fair value measurement of REO are marketability discounts and estimated selling costs. The Company utilizes third party collateral valuation services and real estate Internet websites to estimate the fair value of REO and adjusts these values to account for various factors, such as historical loss experience, anticipated liquidation timing and estimated selling costs. Significant increases in these assumptions would result in a decrease in the estimated fair value of REO, while decreases in these assumptions would result in a higher estimated fair value.

Significant unobservable inputs used in the fair value measurement of commercial real estate investments are marketability discounts and estimated selling costs. Significant increases in these assumptions would result in a decrease in the estimated fair value of commercial real estate investments, while decreases in these assumptions would result in a higher estimated fair value.

Significant unobservable inputs used in the fair value measurement of common stock warrant liability include the exercise multiple, volatility and expected term. The Company uses these unobservable inputs in a trinomial lattice option pricing model. Significant increases in the exercise multiple or significant decreases in volatility or the expected term would result in a decrease in the estimated fair value of common stock warrant liability, while significant decreases in the exercise multiple or significant increases in volatility or the expected term would result in an increase in the estimated fair value of common stock warrant liability.