12. Fair Value Measurement

There were no assets or liabilities measured at fair value on a recurring basis in the Company’s financial statements as of June 30, 2015 and December 31, 2014.

The following table presents major categories of assets measured at fair value on a non-recurring basis as of June 30, 2015 (in thousands):



			Fair Value Measurements Using
			Quoted prices in			Total
			Active Markets	Significant	Significant	Impairments (1)
		As of	for Identical	Other Observable	Unobservable	For the Six
		June 30,	Assets	Inputs	Inputs	Months Ended
Description		2015	(Level 1)	(Level 2)	(Level 3)	June 30, 2015
Loans measured for
impairment using the fair value
of the underlying collateral	$	110	-	-	110	117
Impaired real estate held-for-sale and held-for-investment		2,525	-	-	2,525	522
Total	$	2,635	-	-	2,635	639

(1)

Total impairments represent the amount of losses recognized during the six months ended June 30, 2015 on assets that were held and measured at fair value as of June 30, 2015.

Quantitative information about significant unobservable inputs within Level 3 on major categories of assets measured on a non-recurring basis is as follows (dollars in thousands):


t
As of June 30, 2015		Fair	Valuation	Unobservable
Description		Value	Technique	Inputs	Range (Average) (1)(2)
Loans measured for
impairment using the fair value
of the underlying collateral	$	110	Fair Value of Collateral	Discount Rates and Appraised Value less Cost to Sell	$0.3 million ($0.3 million)
Impaired real estate held-for-sale and held-for-investment		2,525	Fair Value of Property	Discount Rates and Appraised Value less Cost to Sell	$0.2 - $1.0 million ($0.5 million)
Total	$	2,635

(1) Range and average appraised values were reduced by costs to sell.

(2) Average was computed by dividing the aggregate appraisal amounts by the number of appraisals.

The following table presents major categories of assets measured at fair value on a non-recurring basis as of June 30, 2014 (in thousands):



			Fair Value Measurements Using
			Quoted prices in			Total
			Active Markets	Significant	Significant	Impairments (1)
		As of	for Identical	Other Observable	Unobservable	For the Six
		June 30,	Assets	Inputs	Inputs	Months Ended
Description		2014	(Level 1)	(Level 2)	(Level 3)	June 30, 2014
Loans measured for
impairment using the fair value
of the underlying collateral	$	126	-	-	126	245
Impaired real estate held-for-sale and held-for-investment		11,604	-	-	11,604	2,428
Impaired loans held-for-sale		5,292	-	-	5,292	404
Total	$	17,022	-	-	17,022	3,077

(1) Total impairments represent the amount of losses recognized during the six months ended June 30, 2014 on assets that were held and measured at fair value as of June 30, 2014.

Quantitative information about significant unobservable inputs within Level 3 on major categories of assets measured on a non-recurring basis is as follows (dollars in thousands):



As of June 30, 2014		Fair	Valuation	Unobservable
Description		Value	Technique	Inputs	Range (Average) (1)(2)
Loans measured for
impairment using the fair value
of the underlying collateral	$	126	Fair Value of Collateral	Discount Rates and Appraised Value less Cost to Sell	$0.1 - $0.4 million ($0.2 million)
Impaired real estate held-for-sale and held-for-investment		11,604	Fair Value of Property	Discount Rates and Appraised Value less Cost to Sell	$0.1 - $9.0 million ($1.7 million)
Impaired loans held-for-sale		5,292	Fair Value of Collateral	Discount Rates and Appraised Value less Cost to Sell	$0.1 -$0.7 million ($0.1 million)
Total	$	17,022

(1) Range and average appraised values were reduced by costs to sell.

(2) Average was computed by dividing the aggregate appraisal amounts by the number of appraisals.

There were no material liabilities measured at fair value on a non-recurring basis in the Company’s financial statements as of June 30, 2015 and December 31, 2014.

Loans Measured For Impairment

Impaired loans are generally valued based on the fair value of the underlying collateral less cost to sell as the majority of the Company’s loans are collateral dependent. The fair value of the Company’s loans may significantly increase or decrease based on changes in property values as the Company’s loans are primarily secured by real estate. The Company primarily uses third party appraisals to assist in measuring non-homogenous impaired loans and broker price opinions to assist in measuring homogenous impaired loans. The appraisals generally use the market or income approach valuation technique and use market observable data to formulate an estimate of the fair value of the loan’s collateral. However, the appraiser uses professional judgment in determining the fair value of the collateral, and the Company may also adjust these values for changes in market conditions subsequent to the appraisal date. When current appraisals are not available for certain loans, the Company uses its judgment on market conditions to adjust the most current appraisal. As a consequence, the calculation of the fair value of the collateral is considered a Level 3 input. The Company generally recognizes impairment losses based on third party broker price opinions when impaired homogenous loans become 120 days delinquent. These third party valuations from real estate professionals also use Level 3 inputs in determining fair values. The observable market inputs used to fair value loans include comparable property sales, rent rolls, market capitalization rates on income producing properties, risk adjusted discount rates and foreclosure time frames and exposure periods.

Real Estate Held-for-Sale and Held-for-Investment

Real estate is generally valued using third party appraisals or broker price opinions. These appraisals generally use the market approach valuation technique and use market observable data to formulate an estimate of the fair value of the properties. The market observable data typically consists of comparable property sales, rent rolls, market capitalization rates on income producing properties and risk adjusted discount rates. However, the appraisers or brokers use professional judgment in determining the fair value of the properties and the Company may also adjust these values for changes in market conditions subsequent to the valuation date. As a consequence of using appraisals, broker price opinions and adjustments to appraisals, the calculation of the fair values of the properties is considered a Level 3 input.

Loans Held-for-Sale

Loans held-for-sale are valued using an income approach with Level 3 inputs as market quotes or sale transactions of similar loans are generally not available. The fair value is estimated by discounting forecasted cash flows, using a discount rate that reflects the risks inherent in the loans held-for-sale portfolio. For non-performing loans held-for-sale, the forecasted cash flows are based on the estimated fair value of the collateral less cost to sell adjusted for foreclosure expenses and other operating expenses of the underlying collateral until foreclosure or sale.

The following table presents the fair value of the Company’s financial instruments as of June 30, 2015:



				Fair Value Measurements Using
		Carrying		Quoted prices in
		Amount	Fair Value	Active Markets	Significant	Significant
		As of	As of	for Identical	Other Observable	Unobservable
(in thousands)		June 30,	June 30,	Assets	Inputs	Inputs
Description		2015	2015	(Level 1)	(Level 2)	(Level 3)
Financial assets:
Cash and interest bearing deposits in banks	$	63,387	63,387	63,387	-	-
Loans receivable including loans held-for-sale, net		54,755	66,338	-	-	66,338
Restricted cash and time deposits at financial institutions		2,647	2,647	2,647	-	-
Financial liabilities:
Notes payable		19,270	19,389	-	-	19,389
Note payable to Woodbridge		11,750	11,640	-	-	11,640
Principal and interest advances on residential loans		11,409	10,295	-	-	10,295

The following table presents the fair value of the Company’s financial instruments as of December 31, 2014:



				Fair Value Measurements Using
		Carrying		Quoted prices in
		Amount	Fair Value	Active Markets	Significant	Significant
		As of	As of	for Identical	Other Observable	Unobservable
(in thousands)		December 31,	December 31,	Assets	Inputs	Inputs
Description		2014	2014	(Level 1)	(Level 2)	(Level 3)
Financial assets:
Cash and interest bearing deposits in banks	$	58,819	58,819	58,819	-	-
Loans receivable including loans held-for-sale, net		62,267	73,423	-	-	73,423
Financial liabilities:
Notes payable		17,923	18,196	-	-	18,196
Note payable to Woodbridge		11,750	11,615	-	-	11,615
BB&T preferred interest in FAR		12,348	12,383	-	-	12,383
Principal and interest advances on residential loans		11,171	10,125	-	-	10,125

Management has made estimates of fair value that it believes to be reasonable. However, because there is no active market for many of these financial instruments, management has derived the fair value of the majority of these financial instruments using the income approach technique with Level 3 unobservable inputs. Management estimates used in net present value financial models rely on assumptions and judgments regarding issues where the outcome is unknown and actual results or values may differ significantly from these estimates. The Company’s fair value estimates do not consider the tax effect that would be associated with the disposition of the assets or liabilities at their fair value estimates. As such, the Company may not receive the estimated value upon sale or disposition of the asset or pay the estimated value upon disposition of the liability in advance of its scheduled maturity.

Fair values are estimated for loan portfolios with similar financial characteristics. Loans are segregated by category, and each loan category is further segmented by accruing and nonaccruing categories.

The fair value of accruing loans is calculated by using an income approach with Level 3 inputs. The fair value of accruing loans is estimated by discounting forecasted cash flows using estimated market discount rates that reflect the interest rate and credit risk inherent in the loan portfolio. Management assigns a credit risk premium and an illiquidity adjustment to these loans based on delinquency status. The fair value of non-accrual collateral dependent loans is estimated using an income approach with Level 3 inputs utilizing the fair value of the collateral adjusted for operating and selling expenses and discounted over the estimated holding period based on the market risk inherent in the property.

The fair value of notes payables, including the note payable to Woodbridge, and principal and interest advances on residential loans were measured using the income approach with Level 3 inputs obtained by discounting the forecasted cash flows based on estimated market rates.

BB&T’s preferred interest in FAR was considered an adjustable rate debt security. The fair value of this security was calculated using the income approach with Level 3 inputs. The fair value was obtained by discounting forecasted cash flows by risk adjusted market interest rate spreads to the LIBOR swap curve. The market spreads were obtained from reference data in secondary institutional markets.