FAIR VALUE

9 Months Ended

Jun. 30, 2012

FAIR VALUE [Abstract]

FAIR VALUE

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.

Receivables from managed entities.  The Company recorded a discount on certain of its receivable balances due from its real estate and commercial finance managed entities due to the extended term of the repayment to the Company.  The discount was computed based on estimated inputs, including the repayment term (Level 3).

For the real estate managed entity receivables, the Company assumes the fair value of the real estate investment funds through the sale of the underlying properties.  The net proceeds are applied first to the payoff of the lenders and then to the payment of distributions due to investors; any balance remaining is then available to repay the amounts due to the Company.  The balance sheet date fair value of the properties are individually calculated based on capitalized net operating income, which are derived from capitalization rates from a third-party research firm (for the region in which the properties are located, based on actual sales data for properties sold during the past year) as applied to the Company's internally-generated projected operating results for each of the respective properties.  These projections are historically based and are adjusted for current trends in the marketplace and specific changes as applicable by property.

With respect to the commercial finance partnership receivables, management projects the availability of excess cash flow at the individual investment entity to repay the Company's receivable.  In determining the excess cash flow, management starts with the gross future payments due on leases and loans for each of the funds, which are fixed and determinable, net of debt service and expected credit losses, which are estimated based on a migration analysis which is calculated based on historical data across the entire portfolio of leases and loans. This analysis estimates the likelihood that an account will progress through delinquency stages to ultimate charge-off.  After an account becomes 180 or more days past due, any remaining balance is fully reserved, less an estimated recovery amount based on historical trends (currently estimated at 12.4%).  Cash is first applied to the payoff of the underlying principal and interest on debt used to purchase the portfolios.  The projected cash flows also take into consideration the receipt of other income (such as late fees or residual gains) and the payment of general and administrative expenses of the funds.  The remaining excess cash is then available to repay the amounts due to the Company.

Investment securities − equity securities.  The Company uses quoted market prices (Level 1) to value its investments in RSO and TBBK common stock.

Investment securities − trading securities.  The Company uses third-party dealer quotes or bids to estimate the fair value of its trading securities (Level 2).

Investment securities − CDO securities.  The fair value of CDO securities is based primarily 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 CDO 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 real estate.  The Company received an offer for the sale of one of its assets included in Investments in Real Estate.  The offer was below the book value of the asset and, accordingly, the Company recorded an impairment charge during the nine months ended June 30, 2012 (Level 2).

Investment in CVC Credit Partners.  The Company utilized a third-party valuation firm to value its investment in CVC Credit Partners and the Apidos preferred stock.  The joint venture investment was valued at $28.6 million based on the weighted average of several calculations, including implied transaction, dividend discount, discounted cash flow, and guideline public company models. These valuation models required assumptions and estimates of many critical factors, including revenue and market growth, operating cash flows, market multiples, and discount rates, which took into consideration the current economic environment and credit market conditions (Level 3).

Investment in Apidos preferred stock and contractual commitment.  The Company's investment in the Apidos preferred stock, valued at $6.8 million, as well as the corresponding contractual commitment valued at $453,000, were both based on the present value of the underlying discounted projected cash flows of the legacy Apidos incentive management fees (Level 3).

Investment in LEAF.  The Company's investment in LEAF, also based on a third-party valuation, was valued at $1.7 million. The valuation utilized several approaches, including discounted expected cash flows, market approach and comparable sales transactions to estimate the fair value of the Company's investment in LEAF as a result of the November 2011 LCC Transaction.  These approaches required assumptions and estimates of many critical factors, including revenue and market growth, operating cash flows, market multiples, and discount rates, which were based on the current economic environment and credit market conditions (Level 3).

The following items are included in the Company's fair value disclosures at September 30, 2011; however, due to the LEAF transaction, they are no longer included in the consolidated financial statements:

Retained interest − commercial finance.  During fiscal 2010, the Company sold leases and loans to third-parties in which portions of the proceeds were retained by the purchasers.  The purchasers have the right to return leases and loans that default within periods ranging from approximately six to forty-eight months after the date of sale and to deduct the applicable percentage from the retained proceeds.  The Company determines the fair value of these retained interests by calculating the present value of future expected cash flows using key assumptions for credit losses and discount rates based on historical experience and repayment terms (Level 3).

Interest rate swaps.  These instruments are valued by a third-party pricing agent using an income approach and utilizing models that use as their primary basis readily observable market parameters.  This valuation process considers factors including interest rate yield curves, time value, credit factors and volatility factors.  Although the Company determined that the majority of the inputs used to value its derivatives fell within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with these derivatives utilized Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of these derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of these derivatives. As a result, the Company determined that these derivative valuations in their entirety were classified in Level 2 of the fair value hierarchy.

Guggenheim - secured revolving facility.  The proceeds from this loan were allocated to the revolving facility and the warrants issued to the lender based on their relative fair values, as determined by an independent third-party appraiser.  The appraiser determined the fair value of the debt based primarily on the interest rates of similarly rated notes with similar terms.  The appraiser assessed the fair value of the equity of LEAF in making its determination of the fair value of the warrants (Level 3).

Impaired loans and leases - commercial finance.  Leases and loans are considered impaired when they are 90 or more days past due and are placed on non-accrual status.  The Company records an allowance for the impaired loans and leases based upon historical experience (Level 3).

As of June 30, 2012, the fair value of the Company's assets recorded at fair value on a recurring basis was as follows (in thousands):

	Level 1		Level 2		Level 3		Total
Assets:
Investment securities	$	13,785	$	3,411	$	2,684	$	19,880

As of September 30, 2011, the fair values of the Company's assets and liability recorded at fair value on a recurring basis were as follows (in thousands):

	Level 1		Level 2		Level 3		Total
Assets:
Investment securities	$	12,768	$	−	$	2,356	$	15,124
Retained financial interest - commercial finance		−		−		22		22
Total	$	12,768	$	−	$	2,378	$	15,146
Liability:
Interest rate swap	$	−	$	404	$	−	$	404

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

				Retained
	Investment			Financial
	Securities			Interest
For the Nine Months Ended June 30, 2012:
Balance, beginning of year	$	2,356		$	22
Purchases		600			−
Income accreted		603			−
Payments and distributions received		(856	)		−
Impairment recognized in earnings		(74	)		−
Deconsolidation of LEAF		−			(22	)
Change in unrealized losses - included in accumulated other comprehensive loss		55			−
Balance, end of period	$	2,684		$	−
For the Fiscal Year Ended September 30, 2011:
Balance, beginning of year	$	6,223		$	273
Purchases, sales, issuances and settlements, net		(2,946	)		−
Loss on sale of investment securities, net		(1,470	)		−
Income accreted		948			−
Payment and distributions received		(861	)		(251	)
Change in unrealized losses - included in accumulated other comprehensive loss		462			−
Balance, end of year	$	2,356		$	22

The following table presents the Company's quantitative inputs and assumptions used in determining the fair value of items categorized in Level 3:

	Fair Value at June 30, 2012 (in thousands)		Valuation Technique	Unobservable Input	Range (weighted average)
CDO securities	$	2,684	Discounted cash flow	Constant default rate		2%
				Loss severity rate		30%
				Constant prepayment rate		20%
				Reinvestment price on collateral		99%
				Discount rate		20%

The Company recognized the following changes in carrying value of the assets and liabilities measured at fair value on a non-recurring basis, as follows (in thousands):

	Level 1		Level 2		Level 3		Total
For the Nine Months Ended June 30, 2012:
Assets:
Receivables from managed entities - commercial finance and real estate	$	−	$	−	$	22,890	$	22,890
Investment in real estate		−		815		−		815
Investment in CVC Credit Partners		−		−		28,600		28,600
Investment in Apidos preferred equity		−		−		6,792		6,792
Investment in LEAF		−		−		1,749		1,749
Total	$	−	$	815	$	60,031	$	60,846
Liability:
Apidos contractual commitment	$	−	$	−	$	453	$	453
For the Fiscal Year Ended September 30, 2011:
Assets:
Investments in commercial finance - impaired loans and leases	$	−	$	−	$	310	$	310
Receivables from managed entities		−		−		18,941		18,941
Total	$	−	$	−	$	19,251	$	19,251
Liability:
Guggenheim - secured revolving credit facility	$	−	$	−	$	49,266	$	49,266

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

	June 30, 2012				September 30, 2011
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Receivables from managed entities	$	46,917	$	43,552	$	54,815	$	39,224
Investments in commercial finance - loans held for investment		−		−		19,640		19,550
	$	46,917	$	43,552	$	74,455	$	58,774
Borrowings:
Real estate debt	$	10,574	$	10,729	$	10,700	$	10,700
Senior Notes		10,000		10,863		16,263		17,438
Corporate secured credit facilities and note		−		−		8,743		8,743
Other debt		2,043		1,715		3,807		2,909
Commercial finance debt		−		−		183,146		183,146
	$	22,617	$	23,307	$	222,659	$	222,936

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

The estimated fair value of the receivables from managed entities includes the discounted net projected cash flows available to repay the Company on amounts due from its four commercial finance investment entities.

The carrying value of the Company's corporate secured revolving credit facilities and term note approximates their fair values because of their variable interest rates.  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 for similar loans at June 30, 2012 and September 30, 2011.  The carrying value of the Company's commercial finance debt approximated its fair value due to its recent issuance at September 30, 2011 and was deconsolidated during the Company's first quarter ended December 31, 2011 (all fair values are Level 3).