Fair Value

3 Months Ended

Mar. 31, 2012

Fair Value

Fair Value

8) Fair Value

        Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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. There are three levels of inputs that may be used to measure fair values:

        Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

        Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data (for example, interest rates and yield curves observable at commonly quoted intervals, prepayment speeds, credit risks, and default rates).

        Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Financial Assets and Liabilities Measured on a Recurring Basis

        The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs).

        The fair value of interest-only ("I/O") strip receivable assets is based on a valuation model used by a third party. The Company is able to compare the valuation model inputs and results to widely available published industry data for reasonableness (Level 2 inputs).

			Fair Value Measurements Using
	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets at March 31, 2012:
Available-for-sale securities:
Agency mortgage-backed securities	$	340,181	$	—	$	340,181	$	—
Corporate bonds		10,636		—		10,636		—
Trust preferred securities		35,009		—		35,009		—
I/O strip receivables		2,113		—		2,113		—
Assets at December 31, 2011:
Available-for-sale securities:
Agency mortgage-backed securities	$	350,348	$	—	$	350,348	$	—
Trust preferred securities		30,107		—		30,107		—
I/O strip receivables		2,094		—		2,094		—

        There were no transfers between Level 1 and Level 2 during the period for assets measured at fair value on a recurring basis.

Assets and Liabilities Measured on a Non-Recurring Basis

        The fair value of loans held-for-sale is generally based on obtaining bids and broker indications on the estimated value of these loans held-for-sale, resulting in a Level 2 classification.

        At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower's financial statements, or aging reports, adjusted or discounted based on management's historical knowledge, changes in market conditions from the time of the valuation, and management's expertise and knowledge of the client and client's business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

        Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

			Fair Value Measurements Using
	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets at March 31, 2012:
Impaired loans held-for-sale—other:
Real estate:
Land and construction	$	184		—	$	184		—
Impaired loans—held-for-investment:
Commercial	$	5,674		—		—	$	5,674
Real estate:
Commercial and residential		3,016		—		—		3,016
Land and construction		1,724		—		—		1,724
Home equity		—						—
Consumer		9		—		—		9
	$	10,423		—		—	$	10,423
Foreclosed assets:
Commercial and residential	$	283		—		—	$	283
Land and construction		2,884		—		—		2,884
	$	3,167					$	3,167
Assets at December 31, 2011:
Impaired loans held-for-sale—other:
Real estate:
Land and construction	$	186		—	$	186		—
Impaired loans—held-for-investment:
Commercial	$	6,526		—		—	$	6,526
Real estate:
Commercial and residential		1,794		—		—		1,794
Land and construction		1,590		—		—		1,590
Home equity		32						32
Consumer		10		—		—		10
	$	9,952		—		—	$	9,952
Foreclosed assets:
Commercial and residential	$	156		—		—	$	156
Land and construction		2,156		—		—		2,156
	$	2,312					$	2,312

        The following table shows the detail of the impaired loans held-for-investment and the impaired loans held-for-investment carried at fair value for the periods indicated:

	March 31, 2012			December 31, 2011
	(Dollars in thousands)
Impaired loans held-for-investment:
Book value of impaired loans held-for-investment carried at fair value	$	13,267		$	12,279
Book value of impaired loans held-for-investment carried at cost		3,324			5,635
Total impaired loans held-for-investment	$	16,591		$	17,914
Impaired loans held-for-investment carried at fair value:
Book value of impaired loans held-for-investment carried at fair value	$	13,267		$	12,279
Specific valuation allowance		(2,844	)		(2,327	)
Impaired loans held-for-investment carried at fair value, net	$	10,423		$	9,952

        Impaired loans held-for-investment which are measured primarily for impairment using the fair value of the collateral were $16,591,000 at March 31, 2012, after partial charge-offs of $90,000 in the first three months of 2012. In addition, these loans had a specific valuation allowance of $2,844,000 at March 31, 2012. Impaired loans held-for-investment totaling $13,267,000 at Mach 31, 2012 were carried at fair value as a result of the aforementioned partial charge-offs and specific valuation allowances at period-end. The remaining $3,324,000 of impaired loans were carried at cost at March 31, 2012, as the fair value of the collateral exceeded the cost basis of each respective loan. Partial charge-offs and changes in specific valuation allowances during the first three months of 2012 on impaired loans held-for-investment carried at fair value at March 31, 2012 resulted in an additional provision for loan losses of $713,000.

        Foreclosed assets measured at fair value less costs to sell, had a net carrying amount of $3,167,000, which is made up of the outstanding balance of $3,167,000, with no valuation allowance at March 31, 2012.

        Impaired loans held-for-investment which are measured primarily for impairment using the fair value of the collateral were $17,914,000 at December 31, 2011, after partial charge-offs of $3,604,000 in 2011. In addition, these loans had a specific valuation allowance of $2,327,000 at December 31, 2011. Impaired loans held-for-investment totaling $12,279,000 at December 31, 2011 were carried at fair value as a result of the aforementioned partial charge-offs and specific valuation allowances at year-end. The remaining $5,635,000 of impaired loans were carried at cost at December 31, 2011, as the fair value of the collateral exceeded the cost basis of each respective loan. Partial charge-offs and changes in specific valuation allowances during 2011 on impaired loans held-for-investment carried at fair value at December 31, 2011 resulted in an additional provision for loan losses of $2,916,000.

        At December 31, 2011, other real estate owned had a net carrying amount of $2,312,000, made up of the outstanding balance of $2,312,000, with no valuation allowance at December 31, 2011.

        The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2012:

	Fair Value		Valuation Techniques	Unobservable Inputs	Range (Weighted Average)
	(Dollars in thousands)
Impaired loans—held-for-investment:
Commercial	$	5,674	Third party appraisal	Discount adjustment for differences between comparable sales	2% to 11% (7%)
Real estate:
Commercial and residential		3,016	Third party appraisal	Discount adjustment for differences between comparable sales	6% to 11% (9%)
Land and construction		1,724	Third party appraisal	Discount adjustment for differences between comparable sales	2% to 3% (3%)
Foreclosed assets:
Land and construction		2,884	Third party appraisal	Discount adjustment for differences between comparable sales	0% to 6% (6%)

        The carrying amounts and estimated fair values of financial instruments at March 31, 2012 are as follows:

			Estimated Fair Value
	Carrying Amounts		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	68,665	$	20,450	$	48,215	$	—	$	68,665
Securities available-for-sale		385,826		—		385,826		—		385,826
Loans (including loans held-for-sale), net		741,550		—		4,962		739,430		744,392
FHLB and FRB stock		9,928		—		—		—		N/A
Accrued interest receivable		4,542		—		4,542		—		4,542
Loan servicing rights and I/O strips receivables		2,843		—		5,205		—		5,205
Liabilities:
Time deposits	$	287,601	$	—	$	288,528	$	—	$	288,528
Other deposits		792,649		—		792,649		—		792,649
Subordinated debt		23,702		—		—		15,950		15,950
Accrued interest payable		416		—		416		—		416

        The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2011:

	Carrying Amounts		Estimated Fair Value
Assets:
Cash and cash equivalents	$	72,872	$	72,872
Securities available-for-sale		380,455		380,455
Loans (including loans held-for-sale), net		745,057		745,421
FHLB and FRB stock		9,925		N/A
Accrued interest receivable		3,719		3,719
Loan servicing rights and I/O strips receivables		2,886		5,261
Liabilities:
Time deposits	$	288,528	$	289,512
Other deposits		760,900		760,900
Subordinated debt		23,702		15,950
Accrued interest payable		784		784

        The methods and assumptions, not previously discussed, used to estimate the fair value are described as follows:

Cash and Cash Equivalents

        The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2. Cash on hand and noninterest due from bank accounts are Level 1, whereas, interest bearing due from bank accounts and fed funds sold are Level 2.

Loans

        The fair value of loans held-for-sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

        Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

FHLB and FRB Stock

        It was not practical to determine the fair value of FHLB and FRB stock due to restrictions placed on its transferability.

Accrued Interest Receivable/Payable

        The carrying amounts of accrued interest approximate fair value resulting in a Level 2 classification.

Deposits

        The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 2 classification. The carrying amounts of variable rate, fixed-term money market accounts approximate their fair values at the reporting date resulting in a Level 2 classification. The carrying amounts of variable rate, certificates of deposit approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Subordinated Debt

        The fair values of the subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

Off-balance Sheet Instruments

        Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value of commitments is not material.