NOTE 18 - FAIR VALUE

In analyzing the fair value of its assets and liabilities accounted for on a fair value basis, the Company follows the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities are categorized into one of three levels based on the assumptions (inputs) used in valuing the asset or liability. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are defined as follows:

Level 1 − Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 − Observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.

Level 3 − Unobservable inputs that reflect the entity's own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and that are, consequently, not based on market activity, but upon particular valuation techniques.

There were no transfers between any of the levels within the fair value hierarchy for any of the periods presented.

The following is a discussion of the assets and liabilities that are recorded at fair value on a recurring and non-recurring basis, as well as the valuation techniques applied to each fair value measurement and the estimates and assumptions used by the Company in those measurements.

Investment securities − equity securities. The Company uses quoted market prices to value its investments in DIF and TBBK common stock (Level 1). The Company uses the net asset value ("NAV") calculated by the independent fund administrator to value its investment in RREGPS. The underlying investments in RREGPS are all publicly-traded securities as of December 31, 2014 (Level 2).

Investment securities − trading securities. The Company holds six securities of value within its trading portfolio, five of which are debt or equity investments in externally managed CDO issuers and one of which is a term loan (Level 3).


•	one of the CDOs is a European commercial real estate ("CRE") CDO senior debt investment, valued based on recent market trading data of the same security and a qualitative analysis of the CDO's net asset value.


•	two of the CDOs are substantially liquidated, one holding five assets, four of which are considered worthless, and the other holding one asset. The valuations for these CDOs are based on the net asset values of the remaining assets.


•	one of the CDOs is valued using assumptions of 3% constant default rate, 30% constant prepayment rate, and 30% loss severity rate (with some asset-specific assumptions).


•	one of the CDOs is valued using assumptions of a 9% default rate, 20% constant prepayment rate, and 30% loss severity rate.


•	one loan position was valued based on projected near term cash distributions.

Investment securities − CLO securities. The fair value of CLO securities is based on internally generated expected cash flow models that require significant management judgments and estimates due to the lack of market activity and unobservable pricing inputs. Unobservable inputs into these models include default, recovery, discount and deferral rates, prepayment speeds and reinvestment interest spreads (Level 3).

The significant unobservable inputs used in the fair value measurement of the Company's CLO securities are prepayment rates, probability of default, loss severity rate, reinvestment price on underlying collateral and the discount rate. Significant increases (decreases) in the default or discount rates in isolation would result in a significantly lower (higher) fair value measurement, whereas significant increases (decreases) in the recovery rate, prepayment rate or reinvestment price in isolation would result in a significantly higher (lower) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the discount rate and a directionally opposite change in the assumption used for prepayment rates, recovery rates and reinvestment prices on underlying collateral.

Investment in Apidos-CVC preferred stock and contractual commitment. The Company's contractual commitment associated with its investment in Apidos-CVC preferred stock was initially valued at $589,000 based on the present value of the underlying discounted projected cash flows of the legacy Apidos incentive management fees (Level 3).

The fair values of the Company’s assets and liabilities recorded at fair value on a recurring basis were as follows (in thousands):



	Level 1		Level 2		Level 3		Total
Assets - Investment securities
December 31, 2014	$	310	$	741	$	8,489	$	9,540
December 31, 2013	$	432	$	—	$	7,407	$	7,839



	Level 1		Level 2		Level 3		Total
Liabilities - Apidos contractual commitment
December 31, 2014	$	—	$	—	$	745	$	745
December 31, 2013	$	—	$	—	$	995	$	995

The following table presents additional information about assets which were measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value during 2014 (in thousands):



	Investment Securities
Balance, beginning of year	$	7,407
Purchases	15,063
Income accreted	995
Payments and distributions received	(3,753		)
Sales	(13,177		)
Gain on sales of investment securities	370
Gain on sales of trading securities	1,850
Unrealized holding losses on trading securities	(200		)
Change in unrealized losses included in accumulated other comprehensive loss	(66		)
Balance, end of year	$	8,489



	Investment Securities
Balance, beginning of year	$	10,367
Purchases	11,630
Income accreted	(14,058		)
Payments and distributions received	(1,055		)
Sales	(6,286		)
Impairment recognized in earnings	(214		)
Gain on sales of trading securities	899
Unrealized holding gain on trading securities	6,294
Change in unrealized losses included in accumulated other comprehensive loss	(170		)
Balance, end of year	$	7,407

The following table presents the Company's quantitative inputs and assumptions used in determining the fair value of items categorized in Level 3 (in thousands, except percentages):



	Fair value at December 31, 2014		Valuation Technique	Unobservable Inputs	Assumptions (weighted average)
CLO securities	$	8,014	Discounted cash flow	Constant default rate	0% - 2%
				Loss severity rate	25%
				Constant prepayment rate - year one	30%
				Constant prepayment rate - thereafter	25%
				Reinvestment price on collateral	99.50% - 100%
				Discount rates	13%

Trading securities	$	475	Net asset value	Constant default rate	2%-9%
			Discounted cash flow	Loss severity rate	30%
				Constant prepayment rate	20%-30%

The fair value of financial instruments required to be disclosed at fair value, excluding instruments valued on a recurring basis, is as follows (in thousands):



	December 31, 2014				December 31, 2013
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Borrowings:
Real estate debt	$	10,088	$	11,197	$	10,287	$	10,702
Senior Notes	10,000		12,820		10,000		12,619
Other debt	324		324		332		332
	$	20,412	$	24,341	$	20,619	$	23,653

For cash, receivables and payables, the carrying amounts approximate fair value because of the short-term maturity of these instruments.

The Company estimated the fair value of the real estate debt using current interest rates for similar loans. The Company estimated the fair value of the Senior Notes by applying the percentage appreciation in a high-yield fund with approximately similar quality and risk attributed to the Senior Notes. The carrying value of the Company's other debt was estimated using current interest rates for similar loans at December 31, 2014 and 2013.