Fair Value Measurements | 9 Months Ended |
Sep. 30, 2013 |
Fair Value Measurements | ' |
NOTE 13 — FAIR VALUE MEASUREMENTS |
FASB Accounting Standards Codification (“ASC”) 825, Financial Instruments, requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. FASB ASC 820, Fair Value Measurements (“ASC 820”) defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: |
● Level 1 – Quoted prices in active markets for identical assets or liabilities. |
● Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
● Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
Fair Value Estimates of Financial Instruments |
The following tables present the carrying values and fair value estimates of financial instruments as of September 30, 2013 and December 31, 2012: |
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| | | | 30-Sep-13 | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Fair Value | | | Carrying | | | Estimated | | | | | | | | | | | | | | | | | | | | | | |
Hierarchy | Amount | Fair Value | | | | | | | | | | | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Continuing operations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | Level 1 | | | $ | | 71,367 | | | $ | | 71,367 | | | | | | | | | | | | | | | | | | | | | | |
Restricted cash | | Level 1 | | | | 2,805 | | | | 2,805 | | | | | | | | | | | | | | | | | | | | | | |
Loans receivable, net | | Level 3 | | | | 4,325 | | | | 4,771 | | | | | | | | | | | | | | | | | | | | | | |
Preferred stock (other noncurrent assets) | | Level 3 | | | | 800 | | | | 3,000 | | | | | | | | | | | | | | | | | | | | | | |
Common stock (other current assets) | | Level 2 | | | | 1,359 | | | | 1,359 | | | | | | | | | | | | | | | | | | | | | | |
Discontinued operations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | Level 1 | | | | 114 | | | | 114 | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate investments, net (other current assets) | | Level 1 | | | | 32 | | | | 1,000 | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Continuing operations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Lines of credit | | Level 3 | | | $ | | 500 | | | $ | | 500 | | | | | | | | | | | | | | | | | | | | | | |
Long-term debt: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Notes Payable | | Level 1 | | | | 37,246 | | | | 35,477 | | | | | | | | | | | | | | | | | | | | | | |
Term loan | | Level 3 | | | | 6,000 | | | | 6,000 | | | | | | | | | | | | | | | | | | | | | | |
Seller notes | | Level 3 | | | | 1,173 | | | | 1,173 | | | | | | | | | | | | | | | | | | | | | | |
Common stock warrant liability | | Level 3 | | | | 10,800 | | | | 10,800 | | | | | | | | | | | | | | | | | | | | | | |
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| | | | 31-Dec-12 | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Fair Value | | | Carrying | | | Estimated | | | | | | | | | | | | | | | | | | | | | | |
Hierarchy | Amount | Fair Value | | | | | | | | | | | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Continuing operations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | Level 1 | | | $ | | 50,894 | | | $ | | 50,894 | | | | | | | | | | | | | | | | | | | | | | |
Restricted cash | | Level 1 | | | | 2,805 | | | | 2,805 | | | | | | | | | | | | | | | | | | | | | | |
Investment securities, available for sale | | Level 1 | | | | 3,060 | | | | 3,060 | | | | | | | | | | | | | | | | | | | | | | |
Loans receivable, net | | Level 3 | | | | 24,372 | | | | 24,850 | | | | | | | | | | | | | | | | | | | | | | |
Preferred stock (other noncurrent assets) | | Level 3 | | | | 800 | | | | 2,000 | | | | | | | | | | | | | | | | | | | | | | |
Common stock (other noncurrent assets) | | Level 3 | | | | 1,940 | | | | 1,940 | | | | | | | | | | | | | | | | | | | | | | |
Discontinued operations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | Level 1 | | | | 162 | | | | 162 | | | | | | | | | | | | | | | | | | | | | | |
FHLB stock | | Level 1 | | | | 2,051 | | | | 2,051 | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate investments, net (other assets) | | Level 3 | | | | 51 | | | | 51 | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Continuing operations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Lines of credit | | Level 3 | | | $ | | 1,000 | | | $ | | 1,000 | | | | | | | | | | | | | | | | | | | | | | |
Long-term debt: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Notes Payable | | Level 1 | | | | 37,246 | | | | 34,732 | | | | | | | | | | | | | | | | | | | | | | |
Term loan | | Level 3 | | | | 6,900 | | | | 6,900 | | | | | | | | | | | | | | | | | | | | | | |
Seller notes | | Level 3 | | | | 2,906 | | | | 2,906 | | | | | | | | | | | | | | | | | | | | | | |
Common stock warrant liability | | Level 3 | | | | 2,350 | | | | 2,350 | | | | | | | | | | | | | | | | | | | | | | |
The Company used the following methods and assumptions to estimate the fair value of each class of financial instrument at September 30, 2013 and December 31, 2012: |
Cash and cash equivalents and restricted cash |
Cash and cash equivalents and restricted cash are recorded at historical cost. The carrying value is a reasonable estimate of fair value as these instruments have short-term maturities and market interest rates. |
Investment securities, available for sale |
Investment securities, available for sale were comprised of corporate bonds until the bonds were liquidated in March 2013. Estimated fair values for investment securities, available for sale are based on quoted market prices, where available. |
Loans receivable, net |
Loans receivable, net, consists of residential real estate loans, which were sold in the second quarter of 2013, commercial real estate loans, commercial lines of credit and commercial term notes. |
The estimated fair values of commercial real estate loans and commercial lines of credit consider the collateral coverage of assets securing the loans and estimated credit losses, as well as variable interest rates, which approximate market interest rates. |
The estimated fair value of the residential real estate loans was based on several factors, including current bids and market indications for similar assets, recent sales, discounted cash flow analyses, estimated values of underlying collateral and actual loss severity experience in portfolios backed by similar assets. |
The estimated fair value of the commercial term note is based on a discounted cash flow analysis, which includes assumptions about the amount and timing of expected future cash flows, discounted at rates that reflect the inherent credit, liquidity and uncertainty risks associated with the underlying borrower. |
Preferred stock |
Preferred stock consists of 4.00% cumulative convertible preferred stock of a privately held commercial loan borrower of Signature Special Situations and is classified in other noncurrent assets. The preferred stock has a stated value of $2.0 million and is convertible to 45.0% of the common stock of the company, on a fully diluted basis. The estimated fair value of preferred stock is based on estimates of EBITDA, a sales multiple and a control discount. |
Common stock |
Common stock consists of securities the Company received in exchange for its position in a privately held company’s defaulted corporate bonds pursuant to the issuer’s plan of reorganization in bankruptcy and is classified in other current assets. As of September 30, 2013, although the securities are held for sale, there was no readily determinable fair value for the common stock. The estimated fair value of common stock is based on recent sales reported in the grey market reported by OTC Markets. |
FHLB stock |
Federal Home Loan Bank (“FHLB”) stock was classified in assets of discontinued operations and recorded at cost. FIL was previously a member of the FHLB of San Francisco and, accordingly, was required to purchase stock in order to maintain a borrowing relationship. On July 26, 2013, the Company redeemed the FHLB stock and received $2.1 million in cash. |
Commercial real estate investments, net |
Commercial real estate investments, net is classified in assets of discontinued operations and includes participations in community development projects and similar types of loans and investments that FIL previously maintained for compliance under the Community Reinvestment Act (“CRA”). The fair value of commercial real estate investments is based on various factors including current bids and market indications of similar assets, recent sales and discounted cash flow analyses. At September 30, 2013, the estimated fair value is based on the public announcement of a tender offer for a company in which FIL held an investment. Prior to the announcement, there were limited divestiture options for the investment. |
Lines of credit |
Lines of credit are short-term borrowing facilities, used primarily to support ongoing operations. The carrying value is a reasonable estimate of fair value, as these instruments have short-term maturities and market interest rates. |
Long-term debt |
Long-term debt includes Notes Payable, term loan and seller notes. The fair value of Notes Payable is based on quoted market prices. The fair value of the term loan is based on the market characteristics of the loan terms, including a variable interest rate, scheduled principal amortization and maturity date, generally consistent with market terms. The fair value of the seller notes is based on the market characteristics of the loan terms, scheduled and accelerated principal amortization and maturity date, generally consistent with market terms. |
Common stock warrant liability |
Common stock warrant liability is a derivative liability related to the Warrants that provide for anti-dilution and pricing protection provisions. The fair value of the common stock warrant liability is based on a trinomial lattice option pricing model that utilizes various assumptions, including exercise multiple, volatility and expected term. |
Recurring and Nonrecurring Fair Value Measurements |
In accordance with GAAP, certain assets and liabilities are required to be carried at estimated fair value and are referred to as recurring fair value measurements. From time to time, the Company is required to measure other assets and liabilities at estimated fair value, typically from the application of specific accounting guidance under GAAP and are referred to as nonrecurring fair value measurements. These adjustments to fair value generally result from the application of lower of cost or market accounting or impairment charges of individual assets. |
The following table presents the Company’s assets and liabilities measured at estimated fair value based on the fair value hierarchy on a recurring and nonrecurring basis: |
|
(Dollars in thousands) | Quoted Prices in | | | Significant Other | | | Significant | | | Total Fair Value | | | | | | | | | | | |
Active Markets | Observable Inputs | Unobservable | | | | | | | | | | |
(Level 1) | (Level 2) | Inputs | | | | | | | | | | |
| | (Level 3) | | | | | | | | | | |
Recurring fair value measurements: | | | | | | | | | | | | | | | | | | | | | | | | | |
30-Sep-13 | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock warrant liability | $ | | — | | | $ | | — | | | $ | | 10,800 | | | $ | | | 10,800 | | | | | | | | | | | |
31-Dec-12 | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment securities, available for sale | $ | | 3,060 | | | $ | | — | | | $ | | — | | | $ | | | 3,060 | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock warrant liability | $ | | — | | | $ | | — | | | $ | | 2,350 | | | $ | | | 2,350 | | | | | | | | | | | |
Nonrecurring fair value measurements: | | | | | | | | | | | | | | | | | | | | | | | | | |
30-Sep-13 | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock (other current assets) | $ | | — | | | $ | | 1,359 | | | $ | | — | | | $ | | | 1,359 | | | | | | | | | | | |
Real estate owned, net (discontinued operations) | | — | | | | — | | | | 95 | | | | 95 | | | | | | | | | | | |
31-Dec-12 | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate owned, net (discontinued operations) | $ | | — | | | $ | | — | | | $ | | 830 | | | $ | | | 830 | | | | | | | | | | | |
Commercial real estate investments, net (other current assets – discontinued operations) | | — | | | | — | | | | 51 | | | | 51 | | | | | | | | | | | |
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The following table presents a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2013 and 2012: |
|
(Dollars in thousands) | Beginning | | | Income | | | Transfers | | | Purchases | | | Issuances | | | Settlements | | | Ending | |
Balance | (Expense) | In/Out of | Balance |
| Realized in | Level 3 | |
| Earnings | | |
Three Months Ended September 30, 2013 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock warrant liability | $ | | 7,500 | | | $ | | (3,300 | ) | | $ | | — | | | $ | | — | | | $ | | — | | | $ | | — | | | $ | | 10,800 | |
Three Months Ended September 30, 2012 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Contingent consideration | $ | | 3,746 | | | $ | | (76 | ) | | $ | | — | | | $ | | — | | | $ | | — | | | $ | | — | | | $ | | 3,822 | |
Common stock warrant liability | | 2,000 | | | | (850 | ) | | | — | | | | — | | | | — | | | | — | | | | 2,850 | |
Nine Months Ended September 30, 2013 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock warrant liability | $ | | 2,350 | | | $ | | (8,450 | ) | | $ | | — | | | $ | | — | | | $ | | — | | | $ | | — | | | $ | | 10,800 | |
Nine Months Ended September 30, 2012 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Contingent consideration | $ | | 3,597 | | | $ | | (225 | ) | | $ | | — | | | $ | | — | | | $ | | — | | | $ | | — | | | $ | | 3,822 | |
Common stock warrant liability | | 1,403 | | | | (1,447 | ) | | | — | | | | — | | | | — | | | | — | | | | 2,850 | |
The following table summarizes the total gains (losses) on assets and liabilities recorded on a nonrecurring basis for the periods indicated: |
|
| Three Months Ended September 30, | | | Nine Months Ended September 30, | | | | | | | |
(Dollars in thousands) | 2013 | | | 2012 | | | 2013 | | | 2012 | | | | | | | |
Loans held for sale, net(1): | | | | | | | | | | | | | | | | | | | | | |
Continuing operations | $ | | — | | | $ | | — | | | $ | | | — | | | $ | | | 2,776 | | | | | | | |
Discontinued operations | | — | | | | 14 | | | | — | | | | (1,062 | ) | | | | | | |
Common stock (other current assets) | | (581 | ) | | | — | | | | (581 | ) | | | — | | | | | | | |
Real estate owned, net (discontinued operations) | | — | | | | (22 | ) | | | (283 | ) | | | (711 | ) | | | | | | |
Commercial real estate investments, net (other current assets – discontinued operations) | | — | | | | — | | | | — | | | | (121 | ) | | | | | | |
| $ | | (581 | ) | | $ | | (8 | ) | | $ | | | (864 | ) | | $ | | | 882 | | | | | | | |
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(1) Loans held for sale, net were measured at fair value as of March 31, 2012, however, they do not appear in the table presenting financial and nonfinancial assets and liabilities measured using nonrecurring fair value measurements at September 30, 2013 and December 31, 2012 above, as there were no loans classified as held for sale as of those dates. |
The Company’s Level 3 assets and liabilities are determined using valuation techniques that incorporate unobservable inputs that require significant judgment or estimation. |
The following tables presents quantitative information about the valuation techniques and unobservable inputs applied to Level 2 and Level 3 recurring and nonrecurring fair value measurements as of September 30, 2013 and December 31, 2012: |
|
(Dollars in thousands) | Estimated Fair Value | | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) | | | | | | | | | | | | | | | | |
30-Sep-13 | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock (other current assets) | $ | | 1,359 | | | Market approach | | Broker sales data | | $5.00 ‑ $5.75 per share ($5.04) | | | | | | | | | | | | | | | | |
| Estimated selling costs | | 0.6% ‑ 2.8% (0.7%) | | | | | | | | | | | | | | | | |
Real estate owned, net | | 95 | | | Market approach | | Marketability discounts | | 20.0% (20.0%) | | | | | | | | | | | | | | | | |
(discontinued operations) | | Estimated selling costs | | 8.0% (8.0%) | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock warrant liability | $ | | 10,800 | | | Lattice option | | Exercise multiple | | 2.8x (2.8x) | | | | | | | | | | | | | | | | |
pricing model | | Volatility | | 55.0% (53.0%) | | | | | | | | | | | | | | | | |
| | Expected term | | 3.9 ‑ 4.1 years (4.1 years) | | | | | | | | | | | | | | | | |
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|
(Dollars in thousands) | Estimated Fair Value | | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) | | | | | | | | | | | | | | | | |
31-Dec-12 | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate owned, net (discontinued operations) | $ | | 830 | | | Market approach | | Marketability discounts | | 20.0% (20.0%) | | | | | | | | | | | | | | | | |
| Estimated selling costs | | 8.0% (8.0%) | | | | | | | | | | | | | | | | |
Commercial real estate investments, net | | 51 | | | Market approach | | Marketability discounts | | 60.0% ‑ 90.0% (85.0%) | | | | | | | | | | | | | | | | |
(other current assets - discontinued operations) | | Control discount | | 25.0% (25.0%) | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock warrant liability | $ | | 2,350 | | | Lattice option | | Exercise multiple | | 2.8x (2.8x) | | | | | | | | | | | | | | | | |
pricing model | | Volatility | | 51.0% (51.0%) | | | | | | | | | | | | | | | | |
| | Expected term | | 7.1 ‑ 7.2 years (7.1 years) | | | | | | | | | | | | | | | | |
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Significant unobservable inputs used in the fair value measurement of common stock are broker sales data and estimated selling costs. The Company utilizes third party brokers, grey market sale data reported by OTC Markets and estimated selling costs based on third party brokers. A significant increase in the share price would result in an increase in the estimated fair value of the common stock, while a decrease would result in a decrease in the estimated fair value. |
Significant unobservable inputs used in the fair value measurement of REO are marketability discounts and estimated selling costs. The Company utilizes third party collateral valuation services and real estate Internet websites to estimate the fair value of REO and adjusts these values to account for various factors, such as historical loss experience, anticipated liquidation timing and estimated selling costs. Significant increases in these assumptions would result in a decrease in the estimated fair value of REO, while decreases in these assumptions would result in a higher estimated fair value. |
Significant unobservable inputs used in the fair value measurement of commercial real estate investments are marketability discounts and estimated selling costs. Significant increases in these assumptions would result in a decrease in the estimated fair value of commercial real estate investments, while decreases in these assumptions would result in a higher estimated fair value. |
Significant unobservable inputs used in the fair value measurement of the common stock warrant liability include an exercise multiple, volatility and expected term. The Company uses these unobservable inputs in a trinomial lattice option pricing model. Significant increases in the exercise multiple or significant decreases in volatility or the expected term would result in a decrease in the estimated fair value of the common stock warrant liability, while significant decreases in the exercise multiple or significant increases in volatility or the expected term would result in an increase in the estimated fair value of the common stock warrant liability. |
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