Fair Value Accounting | 9 Months Ended |
Sep. 30, 2013 |
Fair Value Disclosures [Abstract] | ' |
Fair Value Accounting | ' |
Fair Value Accounting |
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Fair Value Measurements |
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The Company's valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs create the following fair value hierarchy: |
•Level 1 – Valuations based on quoted prices in active markets for identical assets and liabilities. |
•Level 2 – Valuations based on observable inputs in active markets for similar assets and liabilities, other than Level 1 prices, such as quoted interest or currency exchange rates. |
•Level 3 – Valuations based on significant unobservable inputs that are supported by little or no market activity, such as discounted cash flow methodologies based on internal cash flow forecasts. |
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The following tables present for each of the fair value hierarchy levels, the Company's assets and liabilities which are measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012 (dollars in thousands): |
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| | | | Fair Value Measurements at Reporting Date Using | | | | |
Description | | Fair Value at | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | | | |
30-Sep-13 | (Level 1) | (Level 2) | (Level 3) | | | | |
Assets: | | | | | | | | | | | | |
Mortgage securities – available-for-sale | | $ | 3,519 | | | $ | — | | | $ | — | | | $ | 3,519 | | | | | |
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Liabilities: | | | | | | | | | | | | |
Contingent consideration (A) | | $ | 237 | | | $ | — | | | $ | — | | | $ | 237 | | | | | |
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(A) | The contingent consideration represents the estimated fair value of the additional potential amounts payable in connection with our acquisition of Corvisa. | | | | | | | | | | | | | | | | | | | |
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| | | | Fair Value Measurements at Reporting Date Using | | | | |
Description | | Fair Value at December 31, 2012 | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs (Level 3) | | | | |
(Level 1) | (Level 2) | | | | |
Assets: | | | | | | | | | | | | |
Mortgage securities – available-for-sale | | $ | 3,906 | | | $ | — | | | $ | — | | | $ | 3,906 | | | | | |
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Liabilities: | | | | | | | | | | | | |
Contingent consideration (A) | | $ | 1,099 | | | $ | — | | | $ | — | | | $ | 1,099 | | | | | |
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(A) | The contingent consideration represents the estimated fair value of the additional potential amounts payable in connection with our acquisitions of Mango and Corvisa, $0.2 million and $0.9 million, respectively. | | | | | | | | | | | | | | | | | | | |
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Valuation Methods and Processes |
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The Company estimates the fair value of all items subject to fair value accounting using present value techniques and generally does not have the option to choose other valuation techniques for these items. There have been no significant changes to the Company's financial statements as a result from changes to the Company's valuation techniques during the nine months ended September 30, 2013. |
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An independent entity has been engaged to prepare projected future cash flows of the Company's mortgage securities for each reporting period (quarterly) used by management to estimate fair value. The Company's internal finance and accounting staff reviews and monitors the work of the independent entity, including analysis of the assumptions used, retrospective review and preparing an overall conclusion of the value and process. All other fair value analysis, consisting of simple cash flow estimates and discounting techniques, is conducted internally by the Company's internal financial staff. The Company's fair value process is conducted under the supervision of the Chief Financial Officer. |
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Mortgage securities – available-for-sale – Mortgage securities classified as available-for-sale are reported at their estimated fair value with unrealized gains and losses reported in accumulated other comprehensive income. To the extent that the cost basis of mortgage securities exceeds the fair value and the unrealized loss is considered to be other than temporary, an impairment charge is recognized and the amount recorded in accumulated other comprehensive income or loss is reclassified to earnings as a realized loss. The specific identification method is used in computing realized gains or losses. The Company uses the discount rate methodology for determining the fair value of its residual securities. The fair value of the residual securities is estimated based on the present value of future expected cash flows to be received. Management's best estimate of key assumptions, including credit losses, prepayment speeds, forward yield curves and discount rates commensurate with the risks involved, are used in estimating future cash flows. |
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Contingent consideration – The Company estimated the fair value of the Corvisa contingent consideration using projected revenue over the earn-out period, and applied a discount rate commensurate with the risks involved to the projected earn-out payments. The key inputs for the projected revenue analysis were the number of units completed and the average amount of revenue per unit. |
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The following table presents certain quantitative information about the significant unobservable inputs used in the fair value measurement for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3). |
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Description | | Valuation Techniques | | Significant Unobservable Inputs | | Range | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | |
Mortgage securities – available-for-sale | | Present value analysis | | Prepayment rates | | 7.5% – 12.6% | | | | | | | | | | | | | | |
| | | | Weighted average life (years) | | 2.0 – 2.0 | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Contingent consideration | | Present value analysis | | Revenue growth | | 0.0% – 19.0% | | | | | | | | | | | | | | |
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As discussed in Note 5 to the condensed consolidated financial statements, the Company's mortgage securities – available-for-sale, are measured at fair value. These securities are valued at each reporting date using significant unobservable inputs (Level 3) by discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. The Company has no other assets measured at fair value. |
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The significant unobservable inputs used in the fair value measurement of mortgage securities – available-for-sale are prepayment rates and the weighted average life for the underlying mortgage loan collateral. Using a faster (higher) estimated prepayment rate would decrease the value of the securities. The Company uses a weighted average life of 2 years from the reporting date for the expected future estimated cash flows. The future cash flows are highly-dependent upon the performance of the underlying collateral of mortgage loans. The nonperformance risk associated with the collateral is the key reason the Company utilizes such a short weighted average life in its calculation. Assuming a shorter weighted average life would decrease the estimated value of the mortgage securities. Alternatively, assuming a longer weighted average life would increase the estimated value of the mortgage securities. |
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The only liability recorded at fair value in the condensed consolidated balance sheets is the contingent consideration liability associated with the Company's acquisition of Corvisa. The payment is contingent on future revenue generated from the original Corvisa technology platform. The obligation is valued at each reporting date using significant unobservable inputs (level 3). The Company estimated the fair value using projected revenue over the earn-out period, and applies a discount rate commensurate with the risks involved to the projected earn-out payments. |
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The significant unobservable input used in the fair value measurement of the contingent consideration liability is the growth of the forecasted revenue to be generated from the original Corvisa technology platform. The Company utilizes forecasted revenue amounts to determine whether the revenue targets set forth in the terms of the acquisition will be achieved. Assuming that the required revenue will not be realized would decrease the estimated fair value of the contingent consideration liability. |
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The following tables provide a reconciliation of the beginning and ending balances for the Company's mortgage securities – available-for-sale, which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine and three months ended September 30, 2013 and 2012 (dollars in thousands): |
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| For the Nine Months Ended | | For the Three Months Ended | | | | | |
September 30, | September 30, | | | | | |
| 2013 | | 2012 | | 2013 | | 2012 | | | | | |
Balance, beginning of period | $ | 3,906 | | | $ | 3,878 | | | $ | 3,402 | | | $ | 4,406 | | | | | | |
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Increases (decreases) to mortgage securities – available-for-sale: | | | | | | | | | | | | |
Accretion of income (A) | 580 | | | 807 | | | 207 | | | 294 | | | | | | |
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Proceeds from paydowns of securities (A) | (552 | ) | | (814 | ) | | (148 | ) | | (312 | ) | | | | | |
Mark-to-market value adjustment | (415 | ) | | 249 | | | 58 | | | (268 | ) | | | | | |
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Net increase (decrease) to mortgage securities – available-for-sale | (387 | ) | | 242 | | | 117 | | | (286 | ) | | | | | |
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Balance, end of period | $ | 3,519 | | | $ | 4,120 | | | $ | 3,519 | | | $ | 4,120 | | | | | | |
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(A) | Cash received on mortgage securities with no cost basis was $3.2 million and $1.2 million for the nine and three months ended September 30, 2013, respectively, and $3.2 million and $0.5 million for the nine and three months ended September 30, 2012, respectively. | | | | | | | | | | | | | | | | | | | |
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The following table provides a reconciliation of the beginning and ending balances for the Company's contingent consideration liability, which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine and three months ended September 30, 2013 and 2012 (dollars in thousands): |
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| For the Nine Months Ended | | For the Three Months Ended | | | | | |
September 30, | September 30, | | | | | |
| 2013 | | 2012 | | 2013 | | 2012 | | | | | |
Balance, beginning of period | $ | 1,099 | | | $ | 1,154 | | | $ | 474 | | | $ | 1,154 | | | | | | |
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Fair value adjustment | (862 | ) | | — | | | (237 | ) | | — | | | | | | |
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Balance, end of period | $ | 237 | | | $ | 1,154 | | | $ | 237 | | | $ | 1,154 | | | | | | |
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The following table provides a summary of the impact to earnings for the nine and three months ended September 30, 2013 and 2012 from adjustments to those Company's assets and liabilities measured at fair value on a recurring and nonrecurring basis (dollars in thousands): |
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| | | | Fair Value Adjustments | | |
| | | | For the Nine Months Ended | | For the Three Months Ended | | |
September 30, | September 30, |
Asset or Liability Measured at Fair Value | | Fair Value Measurement Frequency | | 2013 | | 2012 | | 2013 | | 2012 | | Statement of Operations Line Item Impacted |
Contingent consideration (A) | | Recurring | | (862 | ) | | — | | | (237 | ) | | — | | | Other income (expense) |
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Total fair value gains (B) | | | | $ | (862 | ) | | $ | — | | | $ | (237 | ) | | $ | — | | | |
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(A) | The contingent consideration represents the estimated fair value of the additional potential earn-out opportunity payable in connection with the acquisition of Corvisa that is contingent and based upon certain future earnings targets. | | | | | | | | | | | | | | | | | | | |
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(B) | The Company did not have any impairments relating to mortgage securities – available-for-sale or the nine and three months ended September 30, 2013 and 2012. | | | | | | | | | | | | | | | | | | | |
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The following disclosure of the estimated fair value of financial instruments presents amounts that have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimation methodologies could have a material impact on the estimated fair value amounts. The fair value of short-term financial assets and liabilities, such as service fees receivable, notes receivable, and accounts payable and accrued expenses are not included in the following table as their fair value approximates their carrying value. |
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The estimated fair values of the Company's financial instruments are as follows as of September 30, 2013 and December 31, 2012 (dollars in thousands): |
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| As of September 30, 2013 | | As of December 31, 2012 | | | | | |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | | | | |
Financial assets: | | | | | | | | | | | | |
Restricted cash | $ | 2,131 | | | $ | 2,092 | | | $ | 2,215 | | | $ | 2,150 | | | | | | |
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Mortgage securities – available-for-sale | 3,519 | | | 3,519 | | | 3,906 | | | 3,906 | | | | | | |
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Financial liabilities: | | | | | | | | | | | | |
Senior notes | $ | 83,320 | | | $ | 12,287 | | | $ | 81,728 | | | $ | 11,527 | | | | | | |
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Note payable to related party | 3,863 | | | 2,749 | | | 4,613 | | | 3,064 | | | | | | |
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For the items in the table above not measured at fair value in the statement of financial position but for which the fair value is disclosed, the fair value has been estimated using Level 3 methodologies, based on significant unobservable inputs that are supported by little or no market activity, such as discounted cash flow calculations based on internal cash flow forecasts. No assets or liabilities have been transferred between levels during any period presented. |
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Restricted cash – The fair value of restricted cash was estimated by discounting estimated future release of the cash from restriction. |
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Senior notes – The fair value is estimated by discounting future projected cash flows using a discount rate commensurate with the risks involved. The value of the Senior Notes was calculated assuming that the Company would be required to pay interest at a rate of 1.0% per annum until January 2016, at which time the Company would be required to start paying the Full Rate of three-month LIBOR plus 3.5% until maturity in March 2033. The three-month LIBOR used in the analysis was projected using a forward interest rate curve. |
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Note payable to related party – The fair value of the note payable to related party is estimated by discounting future projected principal and interest payment cash flows using a discount rate commensurate with the risks involved. As of September 30, 2013, the future projected interest payments were calculated assuming the stated rate of 4.0% per annum until maturity in March 2016. |