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Fair Value | 9 Months Ended
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Sep. 30, 2014
Fair Value |
Fair Value | Note 10 — Fair Value Fair Value of Financial Instruments Fair value estimates are dependent upon subjective assumptions and involve significant uncertainties resulting in variability in estimates with changes in assumptions. The following table summarizes the carrying values and the estimated fair values of the Company’s financial instruments as of September 30, 2014 and December 31, 2013:
|  | September 30, 2014 |  | December 31, 2013 |
|  |  |  | Estimated |  |  |  | Estimated |
|  | Carrying Value |  | Fair Value |  | Carrying Value |  | Fair Value |
Financial assets: |  |  |  |  |  |  |  |  |
Loans and investments, net |  | $ | 1,526,641,987 |  | $ | 1,535,535,289 |  | $ | 1,523,699,653 |  | $ | 1,550,248,793 |
Available-for-sale securities |  | 2,529,104 |  | 2,529,104 |  | 37,315,652 |  | 37,315,652 |
Derivative financial instruments |  | 3,020 |  | 3,020 |  | 6,402,336 |  | 6,402,336 |
Financial liabilities: |  |  |  |  |  |  |  |  |
Credit facilities and repurchase agreements |  | $ | 71,306,110 |  | $ | 71,124,471 |  | $ | 159,125,023 |  | $ | 158,735,570 |
Collateralized debt obligations |  | 371,733,279 |  | 271,701,329 |  | 639,622,981 |  | 521,938,885 |
Collateralized loan obligations |  | 545,750,000 |  | 547,220,625 |  | 264,500,000 |  | 266,436,250 |
Senior unsecured notes |  | 97,860,025 |  | 95,902,825 |  | — |  | — |
Junior subordinated notes |  | 159,695,009 |  | 102,264,289 |  | 159,291,427 |  | 101,240,185 |
Notes payable |  | 1,300,000 |  | 1,292,461 |  | 2,500,000 |  | 2,487,287 |
Mortgage note payable - real estate owned and held-for-sale |  | 48,813,906 |  | 46,554,314 |  | 53,751,004 |  | 52,943,305 |
Derivative financial instruments |  | 16,334,580 |  | 16,334,580 |  | 24,794,051 |  | 24,794,051 |
Fair Value Measurement Fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity. Assets and liabilities disclosed at fair value are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities are as follows:
| · |  | Level 1 — Inputs are unadjusted and quoted prices exist in active markets for identical assets or liabilities at the measurement date. The types of assets and liabilities carried at Level 1 fair value generally are government and agency securities, equities listed in active markets, investments in publicly traded mutual funds with quoted market prices and listed derivatives.
| · |  | Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. Level 2 inputs include quoted market prices in markets that are not active for an identical or similar asset or liability, and quoted market prices in active markets for a similar asset or liability. Fair valued assets and liabilities that are generally included in this category are non-government securities, municipal bonds, certain hybrid financial instruments, certain mortgage and asset-backed securities, certain corporate debt, certain commitments and guarantees, certain private equity investments and certain derivatives.
| · |  | Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. These valuations are based on significant unobservable inputs that require a considerable amount of judgment and assumptions. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Generally, assets and liabilities carried at fair value and included in this category are certain mortgage and asset-backed securities, certain corporate debt, certain private equity investments, certain municipal bonds, certain commitments and guarantees and certain derivatives.
Determining which category an asset or liability falls within the hierarchy requires significant judgment and the Company evaluates its hierarchy disclosures each quarter. The following is a description of the valuation techniques used to measure fair value and the general classification of these instruments pursuant to the fair value hierarchy. Loans and investments, net: Fair values of loans and investments that are not impaired are estimated using Level 3 inputs based on discounted cash flow methodology, using discount rates, which, in the opinion of management, best reflect current market interest rates that would be offered for loans with similar characteristics and credit quality. Fair values of loans and investments that are impaired are estimated using Level 3 inputs by the Company that require significant judgments, which include assumptions regarding discount rates, capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders and other factors deemed necessary by management. Available-for-sale securities: Fair values are approximated based on current market quotes received from active markets or financial sources that trade such securities. The fair values of available-for-sale equity securities traded in active markets are approximated using Level 1 inputs, while the fair values of available-for-sale debt securities that are approximated using current, non-binding market quotes received from financial sources that trade such investments are valued using Level 3 inputs. The fair values of RMBS investments at December 31, 2013 were approximated using Level 3 inputs that required significant judgments, and were used in internally developed valuation models, which were compared to current non-binding market quotes received from financial sources that trade such securities. The fair value of a CMBS security is estimated by the Company using Level 3 inputs that require significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders and other factors deemed necessary by management. Derivative financial instruments: Fair values of interest rate swap derivatives are approximated using Level 2 inputs based on current market data received from financial sources that trade such instruments and are based on prevailing market data and derived from third party proprietary models based on well recognized financial principles including counterparty risks, credit spreads and interest rate projections, as well as reasonable estimates about relevant future market conditions. These items are included in other assets and other liabilities on the Consolidated Balance Sheets. The Company incorporates credit valuation adjustments in the fair values of its derivative financial instruments to reflect counterparty nonperformance risk. The fair values of RMBS underlying linked transactions at December 31, 2013 were estimated using Level 3 inputs based on internally developed valuation models, which are compared to broker quotations. The value of the underlying RMBS was then netted against the carrying amount (which approximates fair value) of the repurchase agreement borrowing at the valuation date. The fair value of linked transactions also included accrued interest receivable on the RMBS and accrued interest payable on the underlying repurchase agreement borrowings. Credit facilities, repurchase agreements, notes payable and mortgage notes payable: Fair values are estimated at Level 3 using discounted cash flow methodology, using discount rates, which, in the opinion of management, best reflect current market interest rates for financing with similar characteristics and credit quality. Collateralized debt obligations and collateralized loan obligations: Fair values are estimated at Level 3 based on broker quotations, representing the discounted expected future cash flows at a yield that reflects current market interest rates and credit spreads. Senior unsecured notes: Fair values are estimated at Level 1 based on current market quotes received from active markets. Junior subordinated notes: Fair values are estimated at Level 3 based on broker quotations, representing the discounted expected future cash flows at a yield that reflects current market interest rates and credit spreads. The Company measures certain financial assets and financial liabilities at fair value on a recurring basis. The fair value of these financial assets and liabilities was determined using the following inputs as of September 30, 2014:
|  |  |  |  |  | Fair Value Measurements |
|  | Carrying |  | Fair |  | Using Fair Value Hierarchy |
|  | Value |  | Value |  | Level 1 |  | Level 2 |  | Level 3 |
Financial assets: |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities (1) |  | $ | 2,529,104 |  | $ | 2,529,104 |  | $ | 529,104 |  | $ | — |  | $ | 2,000,000 |
Derivative financial instruments |  | 3,020 |  | 3,020 |  | — |  | 3,020 |  | — |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |
Derivative financial instruments |  | $ | 16,334,580 |  | $ | 16,334,580 |  | $ | — |  | $ | 16,334,580 |  | $ | — |
(1) The Company’s equity securities were measured using Level 1 inputs and the Company’s CMBS investment was measured using Level 3 inputs. The following roll forward table reconciles the beginning and ending balances of financial assets measured at fair value on a recurring basis using Level 3 inputs:
|  | Available-for-sale |  | Derivative |
|  | Securities |  | Financial Instruments |
Balance as of December 31, 2013 |  | $ | 36,580,786 |  | $ | 6,396,853 |
Adjustments to fair value: |  |  |  |  |
Paydowns (1) |  | (663,684 | ) | 1,483,387 |
Net changes in fair value (2) |  | (100,000 | ) | 511,012 |
Sales and settlements (3) |  | (33,817,102 | ) | (8,391,252 | )
Balance as of September 30, 2014 |  | $ | 2,000,000 |  | $ | — |
| (1) |  | Includes an addition of $1.7 million to the derivative financial instruments as a result of a decrease in the amount financed under the respective repurchase agreement.
| (2) |  | Represents the net change in fair value recorded to other income during the nine months ended September 30, 2014.
| (3) |  | Represents the sale of RMBS investments and the settlement of forward contract derivatives for which the Company recorded a gain of $0.5 million and $0.1 million, respectively, to other income during the nine months ended September 30, 2014.
The Company measures certain financial and non-financial assets at fair value on a nonrecurring basis. The fair value of these financial assets was determined using the following inputs as of September 30, 2014:
|  | Net |  |  |  | Fair Value Measurements |
|  | Carrying |  | Fair |  | Using Fair Value Hierarchy |
|  | Value |  | Value |  | Level 1 |  | Level 2 |  | Level 3 |
Financial assets: |  |  |  |  |  |  |  |  |  |  |
Impaired loans, net (1) |  | $ | 112,189,705 |  | $ | 112,189,705 |  | $ | — |  | $ | — |  | $ | 112,189,705 |
(1) The Company had an allowance for loan losses of $116.4 million relating to 12 loans with an aggregate carrying value, before loan loss reserves, of approximately $228.6 million at September 30, 2014. Loan impairment assessments: Loans held for investment are intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan origination costs and fees, loan purchase discounts, and net of the allowance for loan losses when such loan or investment is deemed to be impaired. The Company considers a loan impaired when, based upon current information and events, it is probable that it will be unable to collect all amounts due for both principal and interest according to the contractual terms of the loan agreement. The Company performs evaluations of its loans to determine if the value of the underlying collateral securing the impaired loan is less than the net carrying value of the loan, which may result in an allowance and corresponding charge to the provision for loan losses. These valuations require significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders and other factors deemed necessary by management. The table above includes all impaired loans, regardless of the period in which an impairment was recognized. Quantitative information about Level 3 Fair Value Measurements on a recurring and non-recurring basis:
|  | September 30, 2014 |
|  |  |  | Valuation |  | Significant Unobservable |  | Range |
|  | Fair Value |  | Technique(s) |  | Inputs |  | (Weighted Average) |
Financial assets: |  |  |  |  |  |  |  |  |
Impaired loans (1): |  |  |  |  |  |  |  |  |
Multi-family |  | $ | 2,734,447 |  | Direct capitalization analysis and discounted cash flows |  | Discount rate Capitalization rate Revenue growth rate |  | 8.00% 6.50% to 8.00% (7.07%) 2.00% |
Office |  | 13,747,931 |  | Discounted cash flows |  | Discount rate Capitalization rate Revenue growth rate |  | 8.50% to 12.00% (9.71%) 7.00% to 10.00% (8.21%) 2.50% to 3.00% (2.97%) |
Land |  | 65,157,368 |  | Discounted cash flows |  | Discount rate Capitalization rate Revenue growth rate |  | 15.00% 7.25% 3.00% |
Hotel |  | 30,549,959 |  | Discounted cash flows |  | Discount rate Capitalization rate Revenue growth rate |  | 9.25% 7.25% 3.00% |
CMBS |  | 2,000,000 |  | Discounted cash flows |  | Discount rate |  | 14.16% |
| (1) |  | Includes all impaired loans regardless of the period in which a loan loss provision was recorded.
The Company measures certain assets and liabilities for which fair value is only disclosed. The fair value of these assets and liabilities was determined using the following inputs as of September 30, 2014:
|  |  |  |  |  | Fair Value Measurements |
|  | Carrying |  | Fair |  | Using Fair Value Hierarchy |
|  | Value |  | Value |  | Level 1 |  | Level 2 |  | Level 3 |
Financial assets: |  |  |  |  |  |  |  |  |  |  |
Loans and investments, net |  | $ | 1,526,641,987 |  | $ | 1,535,535,289 |  | $ | — |  | $ | — |  | $ | 1,535,535,289 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |
Credit facilities |  | $ | 71,306,110 |  | $ | 71,124,471 |  | $ | — |  | $ | — |  | $ | 71,124,471 |
Collateralized debt obligations |  | 371,733,279 |  | 271,701,329 |  | — |  | — |  | 271,701,329 |
Collateralized loan obligation |  | 545,750,000 |  | 547,220,625 |  | — |  | — |  | 547,220,625 |
Senior unsecured notes |  | 97,860,025 |  | 95,902,825 |  | 95,902,825 |  | — |  | — |
Junior subordinated notes |  | 159,695,009 |  | 102,264,289 |  | — |  | — |  | 102,264,289 |
Notes payable |  | 1,300,000 |  | 1,292,461 |  | — |  | — |  | 1,292,461 |
Mortgage note payable — real estate owned and held-for-sale |  | 48,813,906 |  | 46,554,314 |  | — |  | — |  | 46,554,314 |

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13537-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13433-108611 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13504-108611 + Details
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