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 the historical trends of the funds (in the range of 8.7% to 12.5%). 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 TBBK and RREDX common stock.

Investment securities − trading securities (Level 3). The Company holds four securities within its trading portfolio, all of which are either debt or equity investments in externally managed CDOs. Each of the four CDOs is in the process of being liquidated and the Company has valued each as follows based on their unique circumstances:


•	One security was redeemed at par subsequent to September 30, 2013 and was valued as such;


•	One security holds cash as its sole remaining asset and, therefore, was valued at the Company’s pro-rata ownership percentage of this asset;

•

Two securities were valued using a discounted net asset value (“NAV”) approach. NAV represents the remaining cash flows to the equity holders of the CDO once all obligations are paid in full. This analysis involves the review of trustee note valuation reports, which quantitatively report CDO payments and collateral performance, and the use of financial software which provides the terms of the CDO’s structure as well as market data to be used comparatively. A discount is applied to NAV to account for uncertainties such as timing of cash to be returned, unforeseen expenses of the CDO, and general compensation that an investor would look for in making such an investment. The typical range of discounts for such uncertainties ranges from 5% to 8%; however, for one of the Company’s positions a 15% discount rate was applied due to the complexity associated with its projected liquidation.

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 2012 (Level 2). The property was 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 2012. The Company determined the fair value of the building using an estimate of the 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 as of its formation on April 17, 2012. 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. The 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, initially valued at $6.8 million, as well as the corresponding contractual commitment, initially 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).

As of September 30, 2013, 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	$	429	$	—	$	9,329	$	9,758

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
Assets:	(Restated)						(Restated)
Investment securities	$	209	$	—	$	10,367	$	10,576

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 nine months ended September 30, 2013 (in thousands):



	Investment Securities
Balance, beginning of year	$	10,367
Purchases	9,832
Income accreted	662
Payments and distributions received	(10,383		)
Impairment recognized in earnings	(214		)
Sales	(5,655		)
Gain on sales of trading securities	4,551
Unrealized holding gain on trading securities	773
Change in unrealized losses included in accumulated other comprehensive loss	(604		)
Balance, end of period	$	9,329



	Investment Securities
	(Restated)
Balance, beginning of year	$	2,981
Purchases	11,578
Income accreted	853
Payments and distributions received	(3,201		)
Sales	(4,159		)
Impairment recognized in earnings	(74		)
Gains on sales of trading securities	1,216
Unrealized holding gain on trading securities	1,272
Change in unrealized losses included in accumulated other comprehensive loss	(99		)
Balance, end of period	$	10,367

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 September 30, 2013		Valuation Technique	Unobservable Inputs	Weighted Average Assumptions
CLO securities	$	5,657	Discounted cash flow	Constant default rate	0% -2%
				Loss severity rate	25%
				Constant prepayment rate- year one	30%
				Constant prepayment rate- year two	25%
				Constant prepayment rate - periods thereafter	25%
				Reinvestment price on collateral	99.75% - 100%
				Discount rates	13.5% - 20%

Trading securities	$	3,672	Discounted cash flow	Discount rates	5% - 15%

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
Nine Months Ended September 30, 2013:
Asset:
Receivables from managed entities – commercial finance, real estate and financial fund management	$	—	$	—	$	4,883	$	4,883
Liability:
Apidos contractual commitment	$	—	$	—	$	994	$	994

Year Ended December 31, 2012:
Assets:
Receivables from managed entities – commercial finance and real estate	$	—	$	—	$	14,506	$	14,506
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
Total	$	—	$	727	$	50,804	$	51,531
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):



	September 30, 2013				December 31, 2012
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:					(Restated)		(Restated)
Receivables from managed entities	$	30,288	$	30,288	30,618		30,618
	$	30,288	$	30,288	$	30,618	$	30,618
Borrowings:
Real estate debt	$	10,335	$	10,869	$	10,473	$	11,398
Senior Notes	10,000		12,223		10,000		11,728
Other debt	45		45		567		567
	$	20,380	$	23,137	$	21,040	$	23,693

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 September 30, 2013 and December 31, 2012.