NOTE 16 - 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.

Investment securities. The Company uses quoted market prices to value its investments in DIF, CIF and TBBK common stock (Level 1).

The fair value of the Company's investments in CLO and CDO securities are 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. The significant unobservable inputs used in the fair value measurement include the constant prepayment rate ("CPR"), a probability of default ("CDR"), 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. As of September 30, 2015, the Company held six securities of value within its trading portfolio, five of which were debt/equity investments in externally managed CDO issuers and one was a term loan (Level 3).

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).

The fair value 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
September 30, 2015	$	466	$	—	$	9,752	$	10,218
December 31, 2014	310		741		8,489		9,540



Liability - Apidos contractual commitment	Level 1		Level 2		Level 3		Total
September 30, 2015	$	—	$	—	$	627	$	627
December 31, 2014	—		—		745		745

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 nine months ended September 30, 2015 (in thousands):



	Investment Securities
Balance, beginning of year	$	8,489
Purchases	2,054
Income accreted	906
Payments and distributions received, net	(1,468		)
Sales	(175		)
Impairment	(152		)
Losses on sales of trading securities	(15		)
Unrealized holding gains on trading securities	87
Change in unrealized gains included in accumulated other comprehensive loss	26
Balance, end of period	$	9,752



	Investment Securities
Balance, beginning of year	$	7,407
Purchases	15,063
Income accreted	995
Payments and distributions received, net	(3,752		)
Sales	(13,235		)
Gain on sale of investment securities, net	445
Unrealized losses on trading securities	(200		)
Gains on trading securities	1,834
Change in unrealized losses included in accumulated other comprehensive loss	(68		)
Balance, end of period	$	8,489

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, 2015		Valuation Technique	Unobservable Inputs	Assumptions (weighted average)
CLO securities	$	8,439	Discounted cash flow	Constant default rate	0.5% - 2%
				Loss severity rate	25%
				Constant prepayment rate	25%
				Reinvestment price on collateral	99.5%
				Reinvestment spread	100% - 450%
				Discount rates	14%

Trading securities	$	1,313	Net asset value	Value of underlying assets	variable
			Discounted cash flow	Constant default rate	4% - 5%
				Constant prepayment rate	30%
				Loss severity rate	30% - 35%

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, 2015				December 31, 2014
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Borrowings:
Real estate debt	$	9,932	$	10,932	$	10,088	$	11,197
Senior Notes	10,000		12,515		10,000		12,820
Other debt	964		964		324		324
	$	20,896	$	24,411	$	20,412	$	24,341

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 attributes as the Senior Notes. The carrying value of the Company's other debt was estimated using current interest rates for similar loans at September 30, 2015 and December 31, 2014.