Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Fair Value Measurements [Abstract]

Fair Value Measurements

NOTE 13 – FAIR VALUE MEASUREMENTS

The Company uses Statement of Financial Accounting Standards "Fair Value Measurements" to define fair value which establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.

The fair value hierarchy is as follows:

Level 1 inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

Level 2 inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

The Company used the following methods and significant assumptions to estimate fair value for its assets measured and carried at fair value in the financial statements:

Investment securities available-for-sale – Securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs. Fair values for investment securities are based on quoted market prices or the market values for comparable securities. The Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things. Available-for-sale securities are the only balance sheet category the Company accounts for at fair value on a recurring basis.

The following table presents information about these securities and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

(Dollars in 000's)
	Fair Value Measurements At September 30, 2011, Using
Description	Fair Value 9/30/2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities:
Collaterialized mortgage obligations	$	136,051	$	—	$	136,051	$	—
Mortgage-backed securities		61,337		—		61,337		—
U.S. Government and agency securities		50,307		—		50,307		—
Obligations of states and political subdivisions		50,922		—		50,922		—
Total assets measured at fair value	$	298,617	$	—	$	298,617	$	—
	Fair Value Measurements At December 31, 2010, Using
Description	Fair Value 12/31/2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities:
Collaterialized mortgage obligations	$	132,217	$	—	$	132,217	$	—
Mortgage-backed securities		9,056		—		9,056		—
U.S. Government and agency securities		36,276		—		36,276		—
Obligations of states and political subdivisions		6,134		—		6,134		—
Total assets measured at fair value	$	183,683	$	—	$	183,683	$	—

Impaired Loans – A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Nonperforming loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value less selling costs ("net realizable value"). As a practical expedient, fair value may be measured based on a loan's observable market price or the underlying collateral securing the loan. Collateral may be real estate or business assets including equipment. The value of collateral is generally determined based on independent appraisals.

Other Real Estate and Foreclosed Assets – Other real estate and foreclosed assets ("OREO") acquired through foreclosure or deeds in lieu of foreclosure are carried at the lower of cost, less costs to sell, or estimated net realizable value utilizing current property appraisal valuations. When property is acquired, any excess of the loan balance over the estimated net realizable value is charged to the allowance for loan losses. Holding costs, subsequent write-downs to net realizable value, if any, or any disposition gains or losses are included in non-interest expense. The Bank had $28.1 million and $32.0 million in OREO at September 30, 2011, and December 31, 2010, respectively.

The following table presents the fair value measurement for non-earning assets as of September 30, 2011, and December 31, 2010, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

(Dollars in 000's)
	Fair Value Measurements As of September 30, 2011, Using
Description	Fair Value 9/30/2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total period losses included in earnings
Other real estate owned and foreclosed assets	$	28,127	$	—	$	—	$	28,127	$	(7,683	)
Loans measured for impairment, net of specific reserves		38,109		—		—		38,109		(5,166	)
Total impaired assets measured at fair value	$	66,236	$	—	$	—	$	66,236	$	(12,849	)
	Fair Value Measurements As of December 31, 2010, Using
Description	Fair Value 12/31/2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total period losses included in earnings
Other real estate owned and foreclosed assets	$	32,009	$	—	$	—	$	32,009	$	(5,347	)
Loans measured for impairment, net of specific reserves		46,863		—		—		46,863		(22,311	)
Total impaired assets measured at fair value	$	78,872	$	—	$	—	$	78,872	$	(27,658	)

As of September 30, 2011, and December 31, 2010, all nonperforming loans were considered impaired and were measured for impairment. The table below shows the detail of the various categories of impaired loans:

(Dollars in 000's)
	As of September 30, 2011			As of December 31, 2010
	Carrying Value			Carrying Value
Impaired loans with charge-offs loan-to-date (1)	$	26,334		$	28,393
Impaired loans with specific reserves		17,118			27,832
Impaired loans with both specific reserves and charge-offs loan-to-date (1)		—			297
Subtotal impaired loans with specific reserves and/or charge-offs loan-to-date		43,452			56,522
Specific reserves associated with impaired loans		(5,343	)		(9,659	)
Total loans measured for impairment, net of specific reserves	$	38,109		$	46,863
Impaired loans without charge-offs or specific reserves	$	34,758		$	73,094
Loans with specific reserves and/or charge-offs loan-to-date		43,452			56,522
Total impaired loans	$	78,210		$	129,616

(1) Total charge-offs incurred from inception of the loans

The following methods and assumptions were used by the Bank in estimating fair values of assets and liabilities in accordance with the provisions of Financial Accounting Standards Board, "Disclosures about Fair Value of Financial Instruments" ASC 825-10-50.

Cash and cash equivalents – The carrying amounts of cash and short-term instruments approximate their fair value.

Interest-bearing deposits with the Federal Home Loan Bank of Seattle ("FHLB") and restricted equity securities – The carrying amount approximates the estimated fair value and expected redemption values.

Investment securities held-to-maturity – Fair values for investment securities are based on quoted market prices or the market values for comparable securities.

Mortgage loans held-for-sale – Mortgage loans held-for-sale are reported at the lower of cost or market value. Cost generally approximates market value, given the short duration of these assets. Gains or losses on the sale of loans held-for-sale are recognized at the time of the sale and determined by the difference between net sale proceeds and the net book value of the loans less the estimated fair value of any retained mortgage servicing rights.

Loans – For variable rate loans that are tied to price and have no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (for example, one-to-four family residential), credit card loans and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for commercial real estate and commercial 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. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values based on current market appraisals, less costs to sell, where applicable.

Deposit liabilities – The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate money market accounts, savings accounts and interest checking accounts approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-term borrowings and securities sold under agreements to repurchase – The carrying amounts of federal funds purchased, securities sold under agreements to repurchase, and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the Bank's current incremental borrowing rate for similar types of borrowing arrangements.

Long-term debt – The fair values of the Bank's long-term debt is estimated using discounted cash flow analyses based on the Bank's current incremental borrowing rate for similar types of borrowing arrangements.

Off-balance sheet instruments – The Bank's off-balance sheet instruments include unfunded commitments to extend credit and standby letters of credit. The fair value of these instruments is not considered practicable to estimate because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs.

The following disclosures are made in accordance with the provisions of "Disclosures About Fair Value of Financial Instruments," which requires the disclosure of fair value information about financial instruments where it is practicable to estimate that value. In cases where quoted market values are not available, the Bank primarily uses present value techniques to estimate the fair values of its financial instruments. Valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used. Accordingly, the estimates provided herein do not necessarily indicate amounts that could be realized in a current market exchange.

In addition, as the Bank normally intends to hold the majority of its financial instruments until maturity, it does not expect to realize many of the estimated amounts disclosed. The disclosures also do not include estimated fair value amounts for items that are not defined as financial instruments but have significant value. These include such off-balance sheet items as core deposit intangibles on acquired deposits. The Bank does not believe that it would be practicable to estimate a representational fair value for these types of items as of the periods presented.

As this standard excludes certain financial instruments and all non-financial instruments from its disclosure requirements, any aggregation of the fair value amounts presented in the following table would not represent the underlying value of the Bank.

The estimated fair values of the Bank's significant on-balance sheet financial instruments at September 30, 2011, and December 31, 2010, were as follows:

(Dollars in 000's)
	As of September 30, 2011				As of December 31, 2010
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	66,061	$	66,061	$	138,974	$	138,974
Interest-bearing certificates of deposit (original maturities greater than 90 days)	$	1,500	$	1,500	$	1,500	$	1,500
Investment securities available-for-sale	$	298,617	$	298,617	$	183,683	$	183,683
Investment securities held-to-maturity	$	—	$	—	$	29,133	$	29,615
Investment securities - CRA	$	2,000	$	2,000	$	2,000	$	2,000
Restricted equity investments	$	3,310	$	3,310	$	3,474	$	3,474
Loans held-for-sale	$	963	$	963	$	929	$	929
Loans	$	853,557	$	855,415	$	978,546	$	913,834
Financial liabilities:
Deposits	$	1,161,032	$	1,168,049	$	1,266,249	$	1,275,519
FHLB borrowings	$	—	$	—	$	22	$	22
Securities sold under agreements to repurchase	$	2,873	$	2,873	$	—	$	—
Junior subordinated debentures	$	30,928	$	12,409	$	30,928	$	20,629