Fair Value

3 Months Ended

Mar. 31, 2012

Fair Value

Fair Value

(14)  Fair Value

We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value for applicable fair value disclosures. Investment securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value certain other assets and liabilities on a non-recurring basis, Portfolio Assets, loans receivable, real estate investments, servicing assets, investments in unconsolidated subsidiaries, and various other assets held for sale (including liabilities related to the assets held for sale). These non-recurring fair value adjustments typically involve lower-of-cost-or-market accounting or write-downs of individual assets.

Fair Value Hierarchy

The accounting guidance on fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). We group our assets and liabilities measured at fair value in three levels of the fair value hierarchy, based on the fair value measurement technique, as described below:

·Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets and liabilities in active exchange markets that the Company has the ability to access at the measurement date.

·Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques with significant assumptions and inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

·Level 3 — Valuation is derived from model-based techniques that use inputs and significant assumptions that are supported by little or no observable market data. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of pricing models, discounted cash flow models and similar techniques.

The level of fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest-level input that is most-significant to the fair value measurement in its entirety. In the determination of the classification of assets and liabilities in Level 2 or Level 3 of the fair value hierarchy, we consider all available information, including observable market data, indications of market conditions, and our understanding of the valuation techniques and significant inputs used. Based upon the specific facts and circumstances, judgments are made regarding the significance of the Level 3 inputs to the fair value measurements of the respective assets and liabilities in their entirety. If the valuation techniques that are most-significant to the fair value measurements are principally derived from assumptions and inputs that are corroborated by little or no observable market data, the asset or liability is classified as Level 3.

For the three-month periods ended March 31, 2012 and 2011, there were no transfers of assets and liabilities recorded at fair value on a recurring or non-recurring basis in or out of the Level 1, 2 or 3 fair value measurement levels.

Determination of Fair Value

We attempt to base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs, when reasonably available, and minimize the use of unobservable inputs when developing fair value measurements. However, active market pricing information and other observable market data are not available for a significant portion of the Company’s financial instruments (primarily distressed assets and non-public debt instruments). In instances where there is limited or no observable market data, fair value measurements are based principally upon our own valuation models and estimates, or combination of our own valuation models and estimates plus independent vendor or broker pricing, and the measurements are often calculated, as applicable, based on current pricing adjusted for the economic and competitive environment, the characteristics of the asset or liability, and other such factors. As with any valuation technique used to estimate fair value, changes in underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values. Accordingly, these fair value estimates may not be realized in an actual sale or immediate settlement of the asset or liability. The Company believes the imprecision of an estimate could significantly impact the fair value measurement.

Following are descriptions of the valuation methodologies used for assets and liabilities recorded at fair value on a recurring or non-recurring basis, and for estimating fair value for financial instruments not reported at fair value on our consolidated balance sheet for disclosure purposes.

Cash and Cash Equivalents and Restricted Cash:  Cash and cash equivalents and restricted cash are carried at historical cost. The carrying amount approximates fair value due to the short-term nature of these instruments.

Portfolio Assets — Loans:  See Note 1 for information on the carrying value of loan Portfolio Assets. Estimated fair values of loan Portfolio Assets are generally determined using a discounted cash flow model, based on collateral valuations and other observable and unobservable inputs, adjusted for various considerations such as market conditions, credit risk, economic and competitive environment, and other assets with similar characteristics (i.e. type, location, etc.) that, in management’s opinion, reflect elements a market participant would consider. The Company classifies its fair value measurement techniques for these assets as Level 3 for non-recurring fair value adjustments, because distressed asset transactions generally do not trade in active markets with readily observable market prices (i.e. price quotations vary substantially over time and among market-makers, and pricing information is generally not released to the public), and the Company’s valuation techniques that are most-significant to the fair value measurements are principally derived from assumptions and inputs that are corroborated by little or no observable market data. Management’s estimates and assumptions including credit risk, cash flows and discount rates are judgmentally determined using, as applicable, available market data (where available), our current pricing information for loans with similar characteristics, and specific borrower information.

Portfolio Assets — Real Estate:  See Note 1 for information on the carrying value of our real estate investments held for sale and held for investment. Fair value measurements for our real estate investments are generally based on collateral valuations using observable inputs and, accordingly, we classify these assets as Level 2 for non-recurring fair value adjustments.

Loans Receivable Held for Investment:  See Note 1 for information on the carrying value of loans receivable held for investment. Estimated fair values of fixed-rate loans receivable, including affiliated loans, are generally determined using a discounted cash flow model, adjusted by an amount for estimated losses, that employs market discount rates and other adjustments that would be expected to be made by a market participant. Estimated fair values of variable-rate loans that re-price frequently at market interest rates are based on carrying values adjusted for estimated credit losses and other adjustments that would be expected to be made by a market participant. The estimated fair value for impaired loans is generally based on collateral valuations using observable and unobservable inputs, adjusted for various considerations that would be expected to be made by a market participant; or discounted cash flow models that employ market discount rates and other adjustments that would be expected to be made by a market participant. The Company classifies its fair value measurement techniques for these assets as Level 3 for non-recurring fair value adjustments because pricing information for similar assets is generally not released to the public, and the Company’s valuation techniques that are most-significant to the fair value measurements are principally derived from assumptions and inputs that are corroborated by little or no observable market data. Management’s estimates and assumptions including credit risk, cash flows and discount rates are judgmentally determined using, as applicable, available market data (where available), our current pricing information for loans with similar characteristics, and specific borrower information.

SBA Loans Held for Sale:  SBA loans receivable held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is generally based on prices that secondary markets are currently offering for loans with similar characteristics. As such, we classify those loans subject to non-recurring fair value adjustments as Level 2.

Investment Securities Available for Sale:  Investment securities available for sale are carried at fair value on our consolidated balance sheet. The Company measures fair value for its marketable equity investment using quoted market prices in an active exchange market for identical assets (Level 1). The Company measures fair value for its asset-backed securities using discounted cash flow models based on assumptions and inputs that are corroborated by little or no observable market data (Level 3). The Company uses this measurement technique for these assets because pricing information and market-participant assumptions for its asset-backed securities are not readily accessible and frequently released to the public.

Investments in Unconsolidated Subsidiaries:  Investments in unconsolidated subsidiaries are generally recorded under the equity method of accounting (see Note 1). Estimated fair values of these investments are based on a discounted cash flow approach using a price quotation for similar investments, adjusted for various considerations that, in management’s opinion, reflect elements a market participant would consider. The Company classifies its fair value measurement techniques for these non-marketable equity investments as Level 3 for non-recurring fair value adjustments because pricing information for similar assets is generally not released to the public, and the Company’s valuation techniques that are most-significant to the fair value measurements are principally derived from assumptions and inputs that are corroborated by little or no observable market data.

Assets Held for Sale, Net of Related Liabilities:  Assets held for sale, net of related liabilities, represent the net assets of three Company subsidiaries that management expects to sell or otherwise dispose, and are carried at the lower-of-cost or market (see Note 3). The composition of these assets and liabilities comprises primarily Portfolio Assets, an affiliated loan receivable, and an affiliated note payable. The estimated fair values of the net assets related to these subsidiaries were based primarily on a price quotation from a prospective buyer and, accordingly, we classify these assets and liabilities as Level 2 for non-recurring fair value adjustments.

Notes Payable and Other Debt Obligations:  Notes payable and other debt obligations are carried at amortized cost, net of unamortized discounts. For disclosure purposes, we are required to estimate the fair value of our notes payable and debt obligations. For our debt instruments, quoted market prices or interest rates for similar debt with comparable terms (or when traded by market participants as an asset) are not readily observable in active trading markets. As such, we estimated the fair value of our debt obligations with Bank of Scotland by discounting the future cash flows of each debt instrument at rates currently offered to us for loan facilities with other creditors that include similar terms and maturities (these discount rates include our current spread levels). Given that our debt obligations with Bank of Scotland were measured at fair value in December 2011 in connection with our debt refinancing transaction, the carrying value approximates fair value for our Bank of Scotland debt obligations. For the remainder of our non-affiliated notes payable and debt obligations, management believes that carrying value approximates fair value since the interest rates and terms on these debt instruments approximate the interest rates, market spreads and terms currently offered by other lenders for similar debt instruments of comparable terms.

Assets Measured at Fair Value on a Recurring Basis

The table below presents the Company’s balances of assets measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011. The Company did not have any liabilities that were measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011.

	At March 31, 2012
(Dollars in thousands)	Level 1		Level 2	Level 3	Total
Investment securities available for sale:
Marketable equity security	$	1,442	—	—	$	1,442
Asset-backed securities	—		—	2,494	2,494
	$	1,442	—	2,494	$	3,936

	At December 31, 2011
(Dollars in thousands)	Level 1		Level 2	Level 3	Total
Investment securities available for sale:
Marketable equity security	$	1,000	—	—	$	1,000
Asset-backed security	—		—	2,798	2,798
	$	1,000	—	2,798	$	3,798

At March 31, 2012 and December 31, 2011, the amortized cost of the Company’s marketable equity security approximated $1.1 million and $1.1 million, respectively. At March 31, 2012 and December 31, 2011, the amortized cost of the Company’s asset-backed securities approximated $2.5 million and $2.8 million, respectively.

The Company used a discounted cash flow model (valuation technique), with a 20% discount rate (significant unobservable input), to measure the estimated fair value of its asset-backed security (Level 3 asset) at March 31, 2012.

The table below summarizes the changes to the Company’s Level 3 assets measured at fair value on a recurring basis for the three-month periods ended March 31, 2012 and 2011:

	Three Months Ended
	March 31,
(Dollars in thousands)	2012			2011
Balance, beginning of period	$	2,798		$	2,605
Total realized and unrealized gains for the period included in:
Net income	159			167
Other comprehensive income	(50		)	155
Purchases	—			3,261
Sales	—			—
Issuances	—			—
Settlements	(413		)	(542		)
Foreign currency translation adjustments	—			—
Net transfers into Level 3	—			—
Balance, end of period	$	2,494		$	5,646

Assets Measured at Fair Value on a Non-Recurring Basis

The Company may be required, from time to time, to measure certain financial and non-financial assets at fair value on a non-recurring basis. These adjustments to fair value generally result from write-downs of financial and non-financial assets as a result of impairment or application of lower-of-cost or fair value accounting. The following table provides the fair value hierarchy and the carrying value of assets on the Company’s consolidated balance sheet at March 31, 2012 and December 31, 2011 that were measured at fair value on a non-recurring basis during the respective three- and twelve-month periods then ended:

	Carrying Value at March 31, 2012
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Portfolio Assets - loans (1)	$	—	$	—	$	860	$	860
Loans receivable - SBA held for investment (1)	—		—		381		381
Real estate held for sale (2)	—		278		—		278

	Carrying Value at December 31, 2011
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Portfolio Assets - loans (1)	$	—	$	—	$	1,923	$	1,923
Loans receivable - SBA held for investment (1)	—		—		559		559
Real estate held for sale (2)	—		6,297		—		6,297
Investments in unconsolidated subsidiaries	—		—		4,567		4,567
Assets held for sale, net of related liabilities	—		2,011		—		2,011

(1)Represents the carrying value of impaired loans that were measured for impairment using the estimated fair value of the collateral for collateral-dependent loans.

(2)Represents the carrying value of foreclosed real estate properties that were impaired and measured at fair value subsequent to their initial classification as foreclosed assets.

The following table presents the decrease in value of certain assets held at the respective period end that were measured at fair value on a non-recurring basis for which a fair value adjustment was included in the Company’s results of operations during the respective period:

	Three Months Ended
	March 31,
(Dollars in thousands)	2012			2011
Portfolio Assets - loans (1)	$	(99	)	$	(22	)
Loans receivable - SBA held for investment (1)	(151		)	(144		)
Real estate held for sale (2)	(70		)	(108		)
Total	$	(320	)	$	(274	)

(1)Represents write-downs of loans based on the estimated fair value of the collateral for collateral-dependent loans.

(2)Represents losses on foreclosed real estate properties that were measured at fair value subsequent to their initial classification as foreclosed assets.

The fair value adjustment reductions in the table above for the three-month periods ended March 31, 2012 and 2011 involved assets held in our Portfolio Asset Acquisition and Resolution business segment.

Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis

The table below presents the carrying amount and estimated fair value of the Company’s financial instruments, including accrued interests (where applicable), that are not recorded at fair value in their entirety on a recurring basis on the Company’s consolidated balance sheets at March 31, 2012  and December 31, 2011. These fair value estimates are generally based on pertinent information that was available to management as of the respective measurement dates. The fair value estimates have not been revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented. We have not included assets that are not financial instruments in our disclosure, such as the value of our servicing assets and investments in unconsolidated subsidiaries.

	March 31, 2012							December 31, 2011
	Carrying		Estimated Fair Value					Carrying		Estimated
(Dollars in thousands)	Amount		Level 1	Level 2	Level 3	Total		Amount		Fair Value
Cash, cash equivalents and restricted cash	$	42,429	42,429	—	—	$	42,429	$	36,031	$	36,031
Loan Portfolio Assets and loans receivable held for investment	119,535		—	—	154,313	154,313		135,423		173,616
SBA loans held for sale	3,260		—	3,609	—	3,609		7,614		8,353
Assets held for sale, net of related liabilities (1)	5,109		—	6,854	—	6,854		4,569		6,634
Notes payable and other debt obligations	165,304		—	—	165,304	165,304		189,936		189,936

(1)Comprised of Portfolio Assets, an affiliated loan receivable and an affiliated note payable (see Note 3).