FAIR VALUE

3 Months Ended

Dec. 31, 2012

Fair Value Disclosures [Abstract]

FAIR VALUE

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 values 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 on 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), the payment of general and administrative expenses of the funds and distributions to limited partners. 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 3).

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 real estate. During fiscal 2012, 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 fiscal 2012 (Level 2). The property was subsequently sold in November 2012.

Investment in real estate - office building. The Company's investment in an office building, located in Philadelphia, Pennsylvania was determined to be impaired during fiscal 2012. The Company determined the fair value of the building using an estimated loan to value based on stabilized projected cash flows (Level 3).

Investment in CVC Credit Partners. The Company utilized a third-party valuation firm to value its investment in CVC Credit Partners and its preferred interest. 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-CVC preferred interest and contractual commitment. The Company's preferred interest in Apidos-CVC, valued at $6.8 million, as well as the corresponding contractual commitment valued at $589,000, 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. 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).

As of December 31, 2012, the fair values of the Company’s assets recorded at fair value on a recurring basis were as follows (in thousands): 

	Level 1		Level 2		Level 3		Total
Asset:
Investment securities	$	15,166	$	—	$	10,367	$	25,533

As of September 30, 2012, the fair values of the Company’s assets recorded at fair value on a recurring basis were as follows (in thousands): 

	Level 1		Level 2		Level 3		Total
Assets:
Investment securities	$	15,697	$	—	$	6,835	$	22,532

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 the three months ended December 31, 2012 (in thousands):

	Investment Securities
Balance, beginning of year	$	6,835
Purchases	4,608
Income accreted	223
Payments and distributions received	(613		)
Sales	(1,160		)
Gain on sales of trading securities	307
Unrealized holding gain on trading securities	164
Change in unrealized losses – included in accumulated other comprehensive loss	3
Balance, end of period	$	10,367

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 for the fiscal year ended September 30, 2012 (in thousands):

	Investment Securities			Retained Financial Interest
Balance, beginning of year	$	2,356		$	22
Purchases	7,570			—
Income accreted	823			—
Payments and distributions received	(2,827		)	—
Sales	(2,999		)	—
Impairment recognized in earnings	(74		)	—
Gains on sales of trading securities	909			—
Unrealized holding gain on trading securities	1,108			—
Deconsolidation of LEAF	—			(22		)
Change in unrealized losses – included in accumulated other comprehensive loss	(31		)	—
Balance, end of year	$	6,835		$	—

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, 2012		Valuation Technique	Unobservable Inputs	Assumptions (weighted average)
CLO securities	$	5,002	Discounted cash flow	Constant default rate	2%
				Loss severity rate	30%
				Constant prepayment rate	25%
				Reinvestment price on collateral	99.5%
				Discount rate	20%

Investment securities - trading securities. Since the Company uses third-party dealer marks to estimate the fair value of its nonmarketable trading securities owned, the valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of December 31, 2012 have not been provided.

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
Three Months Ended December 31 , 2012:
Assets:
Receivables from managed entities – commercial finance, real estate and financial fund management	$	—	$	—	$	14,506	$	14,506
Fiscal Year Ended September 30, 2012:
Assets:
Receivables from managed entities – commercial finance and real estate	$	—	$	—	$	16,752	$	16,752
Investment in real estate	—		727		—		727
Investment in real estate - office building	—		—		906		906
Investment in CVC Credit Partners	—		—		28,600		28,600
Investment in Apidos-CVC preferred interest	—		—		6,792		6,792
Investment in LEAF	—		—		1,749		1,749
Total	$	—	$	727	$	54,799	$	55,526
Liability:
Apidos contractual commitment	$	—	$	—	$	589	$	589

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, 2012				September 30, 2012
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Receivables from managed entities	$	38,685	$	38,685	$	41,051	$	41,051
	$	38,685	$	38,685	$	41,051	$	41,051
Borrowings:
Real estate debt	$	10,473	$	11,398	$	10,531	$	11,554
Senior Notes	10,000		11,728		10,000		11,364
Other debt	2,137		2,117		2,489		2,491
	$	22,610	$	25,243	$	23,020	$	25,409

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 for similar loans at December 31, 2012 and September 30, 2012.