Note 9 - Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Fair Value Disclosures [Text Block]

Note 9:  Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  Available for sale investment securities are recorded at fair value on a recurring basis.  Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as certain loans held for investment and other assets.  These nonrecurring fair value adjustments typically involve the lower-of-cost-or-fair value accounting or impairment or write-down of individual assets.

In accordance with the Fair Value Measurement and Disclosure topic of the Codification, the Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in the principal market or most advantageous market for an asset or liability in an orderly transaction between market participants on the measurement date.  A fair value measurement reflects all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and the risk of nonperformance.

The Company groups its assets and liabilities measured at fair value into a three-level hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active exchange markets, such as the New York Stock Exchange.  Level 1 includes U.S. Treasury and federal agency securities, which are traded by dealers or brokers in active markets.  Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 2 includes mortgage-backed securities, municipal bonds and residential collateralized mortgage obligations as well as other real estate owned and impaired loans collateralized by real property where the fair value is generally based upon independent market prices or appraised values of the collateral.

Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques. Level 3 includes those impaired loans collateralized by business assets where the expected cash flow has been used in determining the fair value.

Assets Recorded at Fair Value on a Recurring Basis

The table below presents assets measured at fair value on a recurring basis.

	At September 30, 2011
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2 )		Significant Unobservable Inputs (Level 3 )
	(In thousands)
U.S. Treasury securities	$	3,600	$	3,600	$	-	$	-
Securities of U.S. government sponsored entities		128,498		128,498		-		-
Municipal bonds:
Federally tax-exempt - California		84,811		-		84,811		-
Federally tax-exempt - 28 other states		174,032		-		174,032		-
Taxable - California		1,586		-		1,586		-
Taxable - 1 other state		5,382		-		5,382		-
Residential mortgage-backed securities ("MBS"):
Guaranteed by GNMA		39,011		-		39,011		-
Issued by FNMA and FHLMC		60,295		-		60,295		-
Residential collateralized mortgage obligations:
Issued or guaranteed by FNMA, FHLMC, or GNMA		48,657		-		48,657		-
All other		5,646		-		5,646		-
Commercial mortgage-backed securities		4,624		-		4,624		-
Asset-backed securities - government guaranteed student loans		7,651		-		7,651		-
FHLMC and FNMA stock		2,787		2,787		-		-
Corporate securities		112,777		-		112,777		-
Other securities		4,283		2,324		1,959		-
Total securities available for sale	$	683,640	$	137,209	$	546,431	$	-

There were no significant transfers in or out of Levels 1 and 2 for the nine months ended September 30, 2011.

	At December 31, 2010
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2 )		Significant Unobservable Inputs (Level 3 )
	(In thousands)
U.S. Treasury securities	$	3,542	$	3,542	$	-	$	-
Securities of U.S. government sponsored entities		172,877		172,877		-		-
Municipal bonds:
Federally tax-exempt - California		83,616		-		83,616		-
Federally tax-exempt - 29 other states		170,741		-		170,741		-
Taxable - California		6,276		-		6,276		-
Taxable - 1 other state		500		-		500		-
Residential mortgage-backed securities ("MBS"):
Guaranteed by GNMA		43,557		-		43,557		-
Issued by FNMA and FHLMC		66,272		-		66,272		-
Residential collateralized mortgage obligations:
Issued or guaranteed by FNMA, FHLMC, or GNMA		18,010		-		18,010		-
All other		7,593		-		7,593		-
Commercial mortgage-backed securities		5,065		-		5,065		-
Asset-backed securities - government guaranteed student loans		8,286		-		8,286		-
FHLMC and FNMA stock		655		655		-		-
Corporate securities		79,191		-		79,191		-
Other securities		5,303		3,342		1,961		-
Total securities available for sale	$	671,484	$	180,416	$	491,068	$	-

Assets Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis that were still held in the balance sheet at September 30, 2011 and December 31, 2010, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at period end.

	At September 30, 2011
	Fair Value		Level 1		Level 2		Level 3		Total Losses
	(In thousands)
Non-covered other real estate owned (1)	$	5,513	$	-	$	5,513	$	-	$	(600	)
Covered other real estate owned (2)		8,651		-		8,651		-		(445	)
Originated impaired loans (3)		1,872		-		1,872		-		-
Total assets measured at fair value on a nonrecurring basis	$	16,036	$	-	$	16,036	$	-	$	(1,045	)

	At December 31, 2010
	Fair Value		Level 1		Level 2		Level 3		Total Losses
	(In thousands)
Non-covered other real estate owned (1)	$	1,863	$	-	$	1,863	$	-	$	(664	)
Originated impaired loans (3)		4,780		-		4,780		-		(829	)
Total assets measured at fair value on a nonrecurring basis	$	6,643	$	-	$	6,643	$	-	$	(1,493	)

(1) Represents the fair value of foreclosed real estate owned that was measured at fair value subsequent to their initial classification as foreclosed assets.

(2) Represents the fair value of foreclosed real estate owned that is covered by the Indemnification Agreement with the FDIC where the real estate was written down subsequent to its initial classification as foreclosed assets. Total losses are reduced by the 80% indemnified loss percentage.

(3) Represents carrying value of loans for which adjustments are predominantly based on the appraised value of the collateral and loans considered impaired under FASB ASC 310-10-35, Subsequent Measurement of Receivables, where a specific reserve has been established or a chargeoff has been recorded.

Disclosures about Fair Value of Financial Instruments

The following section describes the valuation methodologies used by the Company for estimating fair value of financial instruments not recorded at fair value.

Cash and Due from Banks  The carrying amount of cash and amounts due from banks approximate fair value due to the relatively short period of time between their origination and their expected realization.

Money Market Assets  The carrying amount of money market assets approximate fair value due to the relatively short period of time between their origination and their expected realization.

Investment Securities Held to Maturity The fair values of investment securities were estimated using quoted prices as described above for Level 1 and Level 2 valuation.

Loans  Loans were separated into two groups for valuation. Variable rate loans, except for those described below, which reprice frequently with changes in market rates were valued using historical cost. Fixed rate loans and variable rate loans that have reached their minimum contractual interest rates were valued by discounting the future cash flows expected to be received from the loans using current interest rates charged on loans with similar characteristics. Additionally, the allowance for loan losses of $32,893 thousand at September 30, 2011 and $35,636 thousand at December 31, 2010 and the fair value discount due to credit default risk associated with purchased covered and purchased non-covered loans of $48,965 thousand and $16,546 thousand, respectively at September 30, 2011 and $61,784 thousand and $32,382 thousand, respectively at December 31, 2010 were applied against the estimated fair values to recognize estimated future defaults of contractual cash flows. The Company does not consider these values to be a liquidation price for the loans.

FDIC Receivable  The fair value of the FDIC receivable recorded in Other Assets was estimated by discounting estimated future cash flows using current market rates for financial instruments with similar characteristics.

Deposit Liabilities  The carrying amount of checking accounts, savings accounts and money market accounts approximates fair value due to the relatively short period of time between their origination and their expected realization.  The fair values of time deposits were estimated by discounting estimated future cash flows related to these financial instruments using current market rates for financial instruments with similar characteristics.

Short-Term Borrowed Funds  The carrying amount of securities sold under agreement to repurchase and other short-term borrowed funds approximate fair value due to the relatively short period of time between their origination and their expected realization.  The fair values of term repurchase agreements were estimated by using interpolated yields for financial instruments with similar characteristics.

Federal Home Loan Bank Advances  The fair values of FHLB advances were estimated by using interpolated yields for financial instruments with similar characteristics.

Debt Financing and Notes Payable  The fair values of debt financing and notes payable were estimated by using interpolated yields for financial instruments with similar characteristics.

Restricted Performance Share Grants The fair value of liabilities for unvested restricted performance share grants recorded in Other Liabilities were estimated using quoted prices as described above for Level 1 valuation.

The table below is a summary of fair value estimates for financial instruments, excluding financial instruments recorded at fair value on a recurring basis. The values assigned do not necessarily represent amounts which ultimately may be realized. In addition, these values do not give effect to discounts to fair value which may occur when financial instruments are sold in larger quantities.  The carrying amounts in the following table are recorded in the balance sheet under the indicated captions.

The Company has not included assets and liabilities that are not financial instruments, such as goodwill, long-term relationships with deposit, merchant processing and trust customers, other purchased intangibles, premises and equipment, deferred taxes and other assets and liabilities. The total estimated fair values do not represent, and should not be construed to represent, the underlying value of the Company.

	At September 30, 2011				At December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
	(In thousands)
Financial Assets
Cash and due from banks	$	459,754	$	459,754	$	338,793	$	338,793
Money market assets		-		-		392		392
Investment securities held to maturity		755,906		778,330		580,728		594,711
Loans		2,601,946		2,640,281		2,886,448		2,923,612
Other assets - FDIC receivable		38,812		38,733		44,738		44,353
Financial Liabilities
Deposits		4,192,383		4,192,443		4,132,961		4,135,113
Short-term borrowed funds		120,917		120,917		107,385		107,385
Federal Home Loan Bank advances		26,078		26,782		61,698		61,833
Debt financing and notes payable		15,000		15,337		26,363		26,811
Other liabilities - restricted performance share grants		1,546		1,546		2,259		2,259

The majority of the Company’s standby letters of credit and other commitments to extend credit carry current market interest rates if converted to loans. No premium or discount was ascribed to these commitments because virtually all funding would be at current market rates.