FAIR VALUES OF FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2012

Fair Value Disclosures [Abstract]

FAIR VALUES OF FINANCIAL INSTRUMENTS

NOTE 24—FAIR VALUES OF FINANCIAL INSTRUMENTS 

The accounting framework for fair value measurements defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurement. This standard applies to all financial assets and liabilities that are being measured and reported at fair value on a recurring and non-recurring basis.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of December 31, 2012 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) for identical instruments that are highly liquid, observable and actively traded in over-the-counter markets. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable and can be corroborated by market data. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. 

The Company uses fair value to measure certain assets and liabilities on a recurring basis when fair value is the primary measure for accounting. This is done primarily for available-for-sale securities and derivatives. Fair value is used on a nonrecurring basis to measure certain assets when applying lower of cost or market accounting or when adjusting carrying values, such as for loans held for sale, impaired loans, and other real estate owned. Fair value is also used when evaluating impairment on certain assets, including securities, goodwill, core deposit and other intangibles, for valuing assets and liabilities acquired in a business combination and for disclosures of financial instruments as required by accounting standards related to fair value disclosure reporting. 

The following tables present information on the assets measured and recorded at fair value on a recurring and nonrecurring basis at and for the year ended December 31, 2012.

			Financial Assets Measured at Fair Value on a Recurring Basis at December 31, 2012, Using
	Fair value at December 31, 2012		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(in thousands)
U.S. Treasury notes/bills	$	8,011	$	—	$	8,011	$	—
U.S. government agency notes		32,608		—		32,608		—
U.S. government agency mortgage-backed securities		166,749		—		166,749		—
U.S. government agency collateralized mortgage obligations		163,054		—		163,054		—
Municipal securities		7,892		—		7,892		—
Other domestic debt securities		2,727		—		—		2,727
Interest rate caps		106		—		106		—
Total assets measured at fair value	$	381,147	$	—	$	378,420	$	2,727

			Financial Assets Measured at Fair Value on a Non-Recurring Basis at December 31, 2012, Using
	Fair value at December 31, 2012		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total losses
	(in thousands)
Non-covered impaired loans	$	13,472	$	—	$	—	$	13,472	$	(524	)
Non-covered foreclosed property		14,895		—		—		14,895		(1,732	)
Covered foreclosed property		3,900		—		—		3,900		—
Total assets measured at fair value	$	32,267	$	—	$	—	$	32,267	$	(2,256	)

The following tables present information on the assets measured and recorded at fair value on a recurring and nonrecurring basis at and for the year ended December 31, 2011.

			Financial Assets Measured at Fair Value on a Recurring Basis at December 31, 2011, Using
	Fair value at December 31, 2011		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(in thousands)
U.S. Treasury notes/bills	$	45,161	$	—	$	45,161	$	—
U.S. government agency notes		59,446		—		59,446		—
U.S. government agency mortgage-backed securities		133,675		—		133,675		—
U.S. government agency collateralized mortgage obligations		168,174		—		168,174		—
Private label collateralized mortgage obligations		13,042		—		13,042		—
Municipal securities		29,325		—		29,325		—
Other domestic debt securities		4,912		—		2,384		2,528
Interest rate caps		466		—		466		—
Total assets measured at fair value	$	454,201	$	—	$	451,673	$	2,528

			Financial Assets Measured at Fair Value on a Non-Recurring Basis at December 31, 2011, Using
	Fair value at December 31, 2011		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total losses
	(in thousands)
Non-covered impaired loans	$	8,066	$	—	$	—	$	8,066	$	(622	)
Non-covered foreclosed property		20,349		—		—		20,349		(5,784	)
Covered foreclosed property		14,616		—		—		14,616		(455	)
Total assets measured at fair value	$	43,031	$	—	$	—	$	43,031	$	(6,861	)

The following methods were used to estimate the fair value of each class of financial instrument above:

Available-for-sale securities—Fair values for securities are based on quoted market prices of identical securities, where available (Level 1). When quoted prices of identical securities are not available, the fair value estimate is based on quoted market prices of similar securities, adjusted for differences between the securities (Level 2). Adjustments may include amounts to reflect differences in underlying collateral, interest rates, estimated prepayment speeds, and counterparty credit quality. In determining the fair value the securities categorized as Level 2, the Company obtains a report from a nationally recognized broker-dealer detailing the fair value of each security in our portfolio as of each reporting date. The broker-dealer uses observable market information to value our securities, with the primary source being a nationally recognized pricing service. The Company reviews the market prices provided by the broker-dealer for our securities for reasonableness based upon our understanding of the marketplace and we consider any credit issues relating to the bonds. As the Company has not made any adjustments to the market quotes provided to us and they are based on observable market data, they have been categorized as Level 2 within the fair value hierarchy. 

Non-covered and covered impaired loans—Impaired loans are measured and recorded at the fair value of the loan’s collateral on a nonrecurring basis as the impaired loans shown are collateral dependent. The fair value of each loan’s collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the cost related to liquidating such collateral; such valuation inputs result in a nonrecurring fair value measurement that is categorized as a Level 3 measurement.

Non-covered and covered foreclosed property—Foreclosed property is initially measured at fair value at acquisition and carried at the lower of this new cost basis or fair value on a nonrecurring basis. The foreclosed property shown is collateral dependent and, accordingly, is measured based on the fair value of such collateral. The fair value of collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the estimated cost related to liquidating such collateral; such valuation inputs result in a nonrecurring fair value measurement that is categorized as a Level 3 measurement.

The Company is required to disclose estimated fair values for our financial instruments during annual and interim reporting periods. Fair value estimates, methods and assumptions, set forth below for our financial instruments, are made solely to comply with the requirements of the disclosures regarding fair value of financial instruments. The following describes the methods and assumptions used in estimating the fair values of financial instruments, excluding financial instruments already recorded at fair value as described above. 

Cash and cash equivalents— The carrying amounts of cash and interest bearing deposits at other banks is assumed to be the fair value given the liquidity and short-term nature of these deposits.

Non-covered and covered loans—Loans are not measured at fair value on a recurring basis. Therefore, the following valuation discussion relates to estimating the fair value to be disclosed under fair value disclosure requirements. Loans were divided into four major groups. The loan groups included (1) loans that mature or re-price in three months or less, (2) loans that amortize or mature in more than three months, (3) impaired loans, and (4) loans acquired in the Western Commercial Bank and San Luis Trust Bank acquisitions. We estimated the fair value of the loans that mature or re-price within three months, impaired loans and loans acquired in the Western Commercial Bank and San Luis Trust Bank acquisitions at their carrying value. We used discounted cash flow methodology to estimate the fair value of loans that amortize or mature in more than three months. We developed pools of these loans based on similar characteristics such as underlying type of collateral, fixed or adjustable rate of interest, payment or amortization method, credit risk categories and other factors. We projected monthly principal and interest cash flows based on the contractual terms of the loan, adjusted for assumed prepayments and defaults, and discounted these at a rate that considered funding costs, a market participant’s required rate of return and adjusted for servicing costs and a liquidity discount. Loans are not normally purchased and sold by the Company, and there are no active trading markets for much of this portfolio. 

FDIC shared-loss asset—The fair value of the FDIC shared-loss asset represents the present value of the amounts we expect to receive from the FDIC under our shared-loss agreements and is based upon estimated cash flows from our covered assets discounted by a rate reflective of the creditworthiness of the FDIC as would be required by market.

Bank owned life insurance assets—Fair values of insurance policies owned are based on the insurance contract’s cash surrender value.

Interest rate caps—The fair values of interest rate caps are estimated using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculations of projected receipts on the caps are based on an expectation of future interest rates derived from observable market interest rates curves and volatilities. In addition, the Company incorporates credit valuation adjustments to appropriately reflect nonperformance risk in the fair value measurements of its derivatives. The credit valuation adjustments are calculated by determining the total expected exposure of the derivatives (which incorporates both the current and potential future exposure) and then applying the counterparties’ credit spreads to the exposure. The total expected exposure of a derivative is derived using market-observable inputs, such as yield curves and volatilities. For the counterparties’ credit spreads, the credit spreads over LIBOR used in the calculations represent implied credit default swap spreads obtained from a third party credit data provider. In adjusting the estimated fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements. 

Deposits—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 and fixed-term certificates of deposit (CDs) 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.

Federal Home Loan Bank advances and other borrowings—The fair value of the FHLB advances and other borrowings is estimated using a discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Junior subordinated debentures—The fair value of the debentures is estimated using a discounted cash flow analysis based on current incremental borrowing rates for similar types of borrowing arrangements. 

Off-balance sheet instruments—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 tables estimate fair values and the related carrying amounts of the Company’s financial instruments:

			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs		Fair
As of December 31, 2012	Amount		(Level 1)		(Level 2)		(Level 3)		Value
	(in thousands)
Financial assets:
Cash, due from banks and interest-bearing deposits with other banks	$	166,874	$	166,874	$	−	$	−	$	116,874
Securities available-for-sale		381,041		−		378,314		2,727		381,041
FHLB and other stock		10,784		−		−		10,784		10,784
Bank owned life insurance assets		13,097		13,097		−		−		13,097
Non-covered loans, net		1,061,193		−		−		966,505		966,505
Covered loans		102,431		−		−		116,141		116,141
FDIC shared-loss asset		45,345		−		−		24,129		24,129
Interest rate cap		106		−		−		106		106
Financial liabilities:
Demand deposits, money market and savings		1,239,272	$	1,239,272	$	−	$	−		1,239,272
Time certificates of deposit		268,560		−		270,778		−		270,778
FHLB advances and other borrowings		107,054		−		110,767		−		110,767
Junior subordinated debentures		26,805		−		−		14,462		14,462
FDIC shared-loss liability		3,900		−		−		3,900		3,900

			Quoted
			Prices in
			Active			Significant
			Markets for			Other		Significant
			Identical			Observable		Unobservable
	Carrying		Assets			Inputs		Inputs		Fair
As of December 31, 2011	Amount		(Level 1)		(Level 2)			(Level 3)		Value
	(in thousands)
Financial assets:
Cash, due from banks and interest-bearing deposits with other banks	$	61,432	$	61,432		$	−	$	−	$	61,432
Securities available-for-sale		453,735		−			451,207		2,528		453,735
FHLB and other stock		11,567		−			−		11,567		11,567
Bank owned life insurance assets		12,670		12,670			−		−		12,670
Non-covered loans, net		918,356		−			−		822,081		822,081
Covered loans		135,412		−			−		137,147		137,147
FDIC shared-loss asset		68,083		−			−		68,083		68,083
Interest rate cap		466		−			−		466		466
Financial liabilities:
Demand deposits, money market and savings		1,075,233	$	1,075,233		$	−	$	−		1,075,233
Time certificates of deposit		350,036		−			351,815		−		351,815
FHLB advances and other borrowings		117,719		−			123,375		−		123,375
Junior subordinated debentures		26,805		−			−		14,173		14,173
FDIC shared-loss liability		3,757		−			−		3,757		3,757

These fair value disclosures represent the Company’s best estimates based on relevant market information and information about the financial instruments. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of the various instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in the above methodologies and assumptions could significantly affect the estimates.