FAIR VALUE OF FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2015

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

Our derivative financial instruments (see Note 12) are measured at fair value on a recurring basis and are presented on the balance sheet at fair value, on a gross basis, excluding accrued interest. The table below presents the fair value of our derivative financial instruments as well as their classification on our consolidated balance sheets:


	December 31,					Balance Sheet
	2015		2014		Level	Location
	(in thousands)
Liabilities:
Interest rate swaps	$	2,519	$	—	2	Other liabilities

Interest Rate Swaps –We estimate the fair value of our interest rate swaps by calculating the credit-adjusted present value of the expected future cash flows of each swap. The calculation incorporates the contractual terms of the derivatives, observable market interest rates which we consider to be Level 2 inputs, and credit risk adjustments, if any, to reflect the counterparty's as well as our own nonperformance risk.

The estimated fair values of those financial instruments which are not recorded at fair value on a recurring basis on our consolidated balance sheets were as follows:


	December 31, 2015				December 31, 2014
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value		Level
	(in thousands)
Assets held for sale:
Loans receivable subject to credit risk	$	46,456	$	46,697	$	147,648	$	154,252	3
SBA 7(a) loans receivable, subject to secured borrowings		36,646		37,121		41,404		41,901	3
Commercial real estate loan, subject to secured borrowing		20,338		20,408		—		—	3
Liabilities:
Secured borrowings, included in liabilities associated with assets held for sale		47,121		47,121		41,901		41,901	3
Junior subordinated notes		24,979		25,046		24,906		24,877	3
Mortgages payable		145,969		147,516		223,808		231,806	3
Unsecured credit facility		107,000		107,000		360,000		360,000	3
Unsecured term loan facility		385,000		385,000		—		—	3

Management’s estimation of the fair value of our financial instruments other than our interest rate swaps is based on a Level 3 valuation in the fair value hierarchy established for disclosure of how a company values its financial instruments. In general, quoted market prices from active markets for the identical financial instrument (Level 1 inputs), if available, should be used to value a financial instrument. If quoted prices are not available for the identical financial instrument, then a determination should be made if Level 2 inputs are available. Level 2 inputs include quoted prices for similar financial instruments in active markets for identical or similar financial instruments in markets that are not active (i.e., markets in which there are few transactions for the financial instruments, the prices are not current, price quotations vary substantially, or in which little information is released publicly). There is limited reliable market information for our financial instruments other than our interest rate swaps and we utilize other methodologies based on unobservable inputs for valuation purposes since there are no Level 1 or Level 2 inputs available. Accordingly, Level 3 inputs are used to measure fair value.

In general, estimates of fair value may differ from the carrying amounts of the financial assets and liabilities primarily as a result of the effects of discounting future cash flows. Considerable judgment is required to interpret market data and develop estimates of fair value. Accordingly, the estimates presented are made at a point in time and may not be indicative of the amounts we could realize in a current market exchange.

Loans Receivable Subject to Credit Risk—Loans receivable were initially recorded at estimated fair value at the Acquisition Date. Loans receivable originated subsequent to the Acquisition Date are recorded at cost upon origination and adjusted by net loan origination fees and discounts. In order to determine the estimated fair value of our loans receivable, we use a present value technique for the anticipated future cash flows using certain assumptions. At December 31, 2015, our assumptions included discount rates ranging from 8.00% to 12.75% and a prepayment rate of 15.00%. At December 31, 2014, our assumptions included discount rates ranging from 5.90% to 14.90% and a prepayment rate of 15.00%.

SBA 7(a) Loans Receivable, Subject to Secured Borrowings—These loans receivable represent the government guaranteed portion of loans which were sold with the proceeds received from the sale reflected as secured borrowings – government guaranteed loans (a liability associated with assets held for sale on our consolidated balance sheets (Note 7)). There is no credit risk associated with these loans since the SBA has guaranteed payment of the principal. In order to determine the estimated fair value of these loans receivable, we use a present value technique for the anticipated future cash flows taking into consideration the lack of credit risk and using a prepayment rate of 15.00% at both December 31, 2015 and 2014.

Commercial Real Estate Loan, Subject to Secured Borrowing—In order to determine the estimated fair value of our commercial real estate loan receivable which consists of a mezzanine loan, we use a present value technique for the anticipated future cash flows using certain assumptions including a discount rate of 9.77%. For the purpose of fair value determination, there is no prepayment anticipated and no potential credit deterioration anticipated on this loan at December 31, 2015.

Secured Borrowings—The carrying amount of secured borrowings approximates fair value, as the interest rates on these secured borrowings approximate current market interest rates, and includes the unamortized deferred cash premiums collected on the sale of certain portions of the related loans, which are included in liabilities associated with assets held for sale.

Junior Subordinated Notes—The fair value of the junior subordinated notes is estimated based on current interest rates available for debt instruments with similar terms. Discounted cash flow analysis is generally used to estimate the fair value of our junior subordinated notes. The rate used was 4.44% and 3.83% at December 31, 2015 and 2014, respectively.

Unsecured Credit and Term Loan Facilities—The carrying amount is a reasonable estimation of fair value as the interest rates on the unsecured credit and term loan facilities are variable and are at current market interest rates.

Mortgages Payable—The fair values of mortgages payable are estimated based on current interest rates available for debt instruments with similar terms. The fair value of our mortgages payable is sensitive to fluctuations in interest rates. Discounted cash flow analysis is generally used to estimate the fair value of our mortgages payable, using rates ranging from 4.42% to 4.72% and 3.92% to 4.12% at December 31, 2015 and 2014, respectively.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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