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 as if the entities had sold the underlying properties. The assumed 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 adjusted for, current trends in the marketplace and specific changes that may be applicable to a particular property.

With respect to the commercial finance partnership receivables, the Company projects the availability of excess cash flow at the individual investment entity to repay the Company's receivable. In determining the excess cash flow, the Company 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 7.30% - 10.35%). 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 to value its investments in DIF and TBBK common stock (Level 1). The Company uses the net asset value ("NAV") calculated by the independent fund administrator to value its investment in RREGPS. The underlying investments in RREGPS are all publicly traded securities as of June 30, 2014 (Level 2).

Investment securities − trading securities. The Company holds nine securities within its trading portfolio, eight of which are debt or equity investments in externally managed CDOs and one of which is a term loan (Level 3).

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One of the CDOs is substantially through the liquidation process. Accordingly, the Company has valued its investment based on the CDO's NAV, which reflects the remaining cash flows to the beneficial owners of the CDOs once all obligations have been paid in full. In performing its analysis, the Company reviewed the trustee note valuation reports for CDO payments and collateral performance, and used financial software to provide the terms of the CDO’s structure as well as market data to be used comparatively.


•	One of the CDOs is an illiquid European CDO equity investment, valued based on recent market trading data for similar securities.


•	Three of the CDOs were valued using a cash flow method, assuming a 2% constant default rate, 20% constant prepayment rate, 30% loss severity rate, and with yield returns between 11.5% and 16.5%.


•	Two of the CDOs were valued at the NAV of the underlying assets, supported by recent market trading activity in the same security.


•	One loan position was valued based on recent observable trades of the same security.

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 Apidos-CVC preferred stock and contractual commitment. The Company's contractual commitment associated with its investment in the Apidos-CVC preferred stock was initially valued at $589,000 based on the present value of the underlying discounted projected cash flows of the legacy Apidos incentive management fees (Level 3).

As of June 30, 2014, 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	$	1,043	$	—	$	11,547	$	12,590

As of December 31, 2013, 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	$	432	$	—	$	7,407	$	7,839

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 six months ended June 30, 2014 (in thousands):



	Investment Securities
Balance, beginning of year	$	7,407
Purchases	11,362
Income accreted	461
Payments and distributions received, net	(854		)
Sales	(8,037		)
Gains on sale of investment securities	370
Gains on sales of trading securities	828
Unrealized holding gains on trading securities	101
Change in unrealized losses included in accumulated other comprehensive loss	(91		)
Balance, end of period	$	11,547



	Investment Securities
Balance, beginning of year	$	10,367
Purchases	11,630
Income accreted	899
Payments and distributions received, net	(14,058		)
Sales	(6,286		)
Impairment recognized in earnings	(214		)
Gains on sales of trading securities	6,294
Unrealized holding losses on trading securities	(1,055		)
Change in unrealized losses included in accumulated other comprehensive loss	(170		)
Balance, end of year	$	7,407

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 June 30, 2014		Valuation Technique	Unobservable Inputs	Assumptions (weighted average)
CLO securities	$	7,026	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 - thereafter	25%
				Reinvestment price on collateral	99.5% - 100%
				Discount rates	13.5%
				Reinvestment spread	200-450 basis points

Trading securities	$	4,521	Net asset value	Discount rates	0% - 10%
			Discounted cash flow	Constant default rate	2%
				Constant prepayment rate	20%
				Loss severity rate	30%

The Company's carrying value of the assets and liabilities measured at fair value on a non-recurring basis were as follows (in thousands):



	Level 1		Level 2		Level 3		Total
As of June 30, 2014
Assets:
Loans and receivables from managed entities – commercial finance and real estate	$	—	$	—	$	2,250	$	2,250
Liability:
Apidos contractual commitment	$	—	$	—	$	815	$	815

As of December 31, 2013
Assets:
Loans and receivables from managed entities – commercial finance and real estate	$	—	$	—	$	4,528	$	4,528
Liability:
Apidos contractual commitment	$	—	$	—	$	995	$	995

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):



	June 30, 2014				December 31, 2013
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Loans and receivables from managed entities	$	32,586	$	32,586	$	30,923	$	30,923

Borrowings:
Real estate debt	$	10,188	$	11,090	$	10,287	$	10,702
Senior Notes	10,000		13,322		10,000		12,619
Other debt	370		370		332		332
	$	20,558	$	24,782	$	20,619	$	23,653

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 approximates fair value because of its recent issuance at June 30, 2014 and December 31, 2013.