NOTE 15 — FAIR VALUE MEASUREMENTS

Fair Value Estimates of Financial Instruments

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

		December 31, 2013
(Dollars in thousands)	Fair Value Hierarchy	Carrying Amount		Estimated Fair Value
ASSETS
Continuing operations:
Cash and cash equivalents	Level 1	$	47,880	$	47,880
Restricted cash	Level 1		2,805		2,805
Loans receivable, net	Level 3		1,407		1,400
Preferred stock (other noncurrent assets)	Level 3		800		4,000
Discontinued operations:
Cash and cash equivalents	Level 1		139		139
LIABILITIES
Continuing operations:
Line of credit	Level 3	$	500	$	500
Long-term debt	Level 3		17,200		17,200
Common stock warrant liability	Level 3		9,300		9,300

		December 31, 2012
(Dollars in thousands)	Fair Value Hierarchy	Carrying Amount		Estimated Fair Value
ASSETS
Continuing operations:
Cash and cash equivalents	Level 1	$	50,894	$	50,894
Restricted cash	Level 1		2,805		2,805
Investment securities, available for sale	Level 1		3,060		3,060
Loans receivable, net	Level 3		24,372		24,850
Preferred stock (other noncurrent assets)	Level 3		800		2,000
Common stock (other noncurrent 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:
Line 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 as of December 31, 2013 and 2012:

Cash and cash equivalents and restricted cash

Cash and cash equivalents and restricted cash 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 were based on quoted market prices.

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, and commercial lines of credit and a term note, which were repaid in the fourth quarter of 2013.

The estimated fair value of commercial real estate loans considers 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 was 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 lines of credit and term note was based on a discounted cash flow analysis, which included 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 consists of 4.00% cumulative convertible preferred stock of a private company with which the Company previously had a commercial lending relationship through Special Situations and is classified in other noncurrent assets. The preferred stock has a stated value of $2.0 million and is convertible to 45.0% of the common stock of the private 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 consisted of securities the Company received in exchange for its position in a private company’s defaulted corporate bonds pursuant to the issuer’s plan of reorganization in bankruptcy and was sold in October 2013 for cash proceeds of $1.4 million. As of December 31, 2012, there was no readily determinable fair value for the common stock, therefore the fair value was estimated from information received from the issuer as it exited bankruptcy.

FHLB stock

Federal Home Loan Bank (“FHLB”) stock was 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. On July 26, 2013, the Company redeemed the FHLB stock and received $2.1 million in cash.

Commercial real estate investments, net

Commercial real estate investments, net were classified in assets of discontinued operations and included participations in community development projects and similar types of loans and investments that FIL previously maintained for compliance with the Community Reinvestment Act (“CRA”). The final CRA investment was redeemed in November 2013 for cash proceeds of $1.0 million. The fair value of commercial real estate investments was based on various factors including current bids and market indications of similar assets, recent sales and discounted cash flow analyses.

Line of credit

The line of credit is a short-term borrowing facility, used primarily to support ongoing operations. The carrying value is a reasonable estimate of fair value, as this instrument has a short-term maturity and a market interest rate.

Long-term debt

Long-term debt included Notes Payable, redeemed on December 31, 2013, term loans and seller notes, prepaid in December 2013. The fair value of the Notes Payable was based on quoted market prices. The fair value of the term loans is based on the market characteristics of the individual loan terms, including interest rates, scheduled principal amortization and maturity dates, generally consistent with market terms. The fair value of the seller notes was 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 with 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 as of December 31, 2013 and 2012 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:
December 31, 2013
Liabilities:
Common stock warrant liability	$	-	$	-	$	9,300	$	9,300
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:
December 31, 2013
Assets:
Real estate owned, net	$	-	$	-	$	75	$	75
December 31, 2012
Assets:
Real estate owned, net	$	-	$	-	$	830	$	830
Commercial real estate investments, net		-		-		51		51

The following table presents the reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2013 and 2012:

(Dollars in thousands)	Beginning Balance		Income (Expense) Realized in Earnings			Transfers In/Out of Level 3			Purchases		Issuances		Settlements		Ending Balance
Year Ended December 31, 2013
Common stock warrant liability	$	2,350	$	(6,950	)	$	-		$	-	$	-	$	-	$	9,300
Year Ended December 31, 2012
Contingent consideration	$	3,597	$	(403	)	$	(4,000	)	$	-	$	-	$	-	$	-
Common stock warrant liability		1,403		(947	)		-			-		-		-		2,350

Contingent consideration transferred out of Level 3 as of December 31, 2012, as a result of the final computation of the contingent consideration liability under the terms of the purchase agreement. Upon the resolution of the contingency, this liability was no longer measured at fair value.

The following table summarizes gains (losses) on assets and liabilities recorded on a nonrecurring basis for the years ended December 31, 2013 and 2012:

	Year Ended December 31,
(Dollars in thousands)	2013			2012
Loans held for sale, net:
Continuing operations	$	-		$	2,776
Discontinued operations		-			(1,062	)
Common stock (other current assets)		(581	)		-
Real estate owned, net		(173	)		(725	)
Commercial real estate investments, net		-			(121	)
	$	(754	)	$	868

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 2 and Level 3 recurring and nonrecurring fair value measurements as of December 31, 2013 and 2012:

	Estimated Fair Value
(Dollars in thousands)	December 31, 2013		Valuation Technique	Unobservable Input	Range (Weighted Average)
Assets:
Real estate owned, net	$	75	Market approach	Marketability discounts	20.0% (20.0%)
(discontinued operations)				Estimated selling costs	8.0% (8.0%)
Liabilities:
Common stock warrant liability	$	9,300	Lattice option pricing model	Exercise multiple	2.8x (2.8x)
				Volatility	55.0% (55.0%)
				Expected term	4.1 - 4.2 years (4.1 years)

	Estimated Fair Value
(Dollars in thousands)	December 31, 2012		Valuation Technique	Unobservable Input	Range (Weighted Average)
Assets:
Real estate owned, net	$	830	Market approach	Marketability discounts	20.0% (20.0%)
(discontinued operations)				Estimated selling costs	8.0% (8.0%)
Commercial real estate investments		51	Market approach	Marketability discounts	60.0% - 90.0% (85.0%)
(discontinued operations)				Control Discount	25.0% (25.0%)
Liabilities:
Common stock warrant liability	$	2,350	Lattice option pricing model	Exercise multiple	2.8x (2.8x)
				Volatility	51.0% (51.0%)
				Expected term	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 the common stock warrant liability include an 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 the 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 the common stock warrant liability.