13. FAIR VALUE

FASB ASC 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

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; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

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.

Securities Available for Sale

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).

Impaired Loans

The fair values of impaired loans are generally measured for impairment using the practical expedients permitted by FASB ASC 310-10-35 including impaired loans measured at an observable market price (if available), or at the fair value of the loan's collateral (if the loan is collateral dependent). Fair value of the loan's collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation, which is then adjusted for the cost related to liquidation of the collateral. These are considered Level 3 inputs.

Derivatives

The fair value of our derivative financial instruments, including interest rate swaps and caps, is based on derivative valuation models using market data inputs as of the valuation date that can generally be verified and do not typically involve significant management judgments. (Level 2 inputs).

Other Real Estate Owned

Other real estate owned is valued at the time the loan is foreclosed upon and the asset is transferred to other real estate owned. The value is based primarily on third party appraisals, less costs to sell and result in a Level 3 classification of the inputs for determining fair value. Other real estate owned is reviewed and evaluated on at least an annual basis for additional impairment and adjusted accordingly, based on the same factors identified above.

Loans held for sale

Loans held for sale are carried at the lower of cost or fair value, as determined by outstanding commitments from investors, or based on recent comparable sales, if available, and if not available, are based on discounted cash flows using current market rates applied to the estimated life and credit risk (Level 2 inputs) or may be assessed based upon the fair value of the collateral which is obtained from 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 appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in Level 3 classification of the inputs for determining fair value.

Assets and liabilities measured at fair value on a recurring basis are summarized below:


			Fair Value Measurements Using
	At December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Assets:
Securities available for sale:
U.S. Treasury	$	300	$	0	$	300	$	0
GSE collateralized mortgage obligations		227,836		0		227,836		0
GSE mortgage-backed securities		487,754		0		487,754		0
Corporate note		4,348		0		4,348		0
Municipal bonds		5,764		0		5,764		0
Mutual funds		14,918		14,918		0		0
Derivatives—Interest rate caps		9		0		9		0

There were no significant transfers between Level 1 and 2 during 2011.


			Fair Value Measurements Using
	At December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Assets:
Securities available for sale:
GSE bonds	$	125,718	$	0	$	125,718	$	0
GSE collateralized mortgage obligations		103,201		0		103,201		0
GSE mortgage-backed securities		284,834		0		284,834		0
Corporate note		3,708		0		3,708		0
Municipal bonds		5,258		0		5,258		0
Mutual funds		5,519		5,519		0		0
Derivatives—Interest rate caps		167		0		167		0

Fair value adjustments for interest rate caps resulted in a net expense of $157 thousand and $901 thousand for 2011 and 2010, respectively.

Assets measured at fair value on a non-recurring basis are summarized below:


			Fair Value Measurements at Using
	At December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Assets:
Impaired loans at fair value:
Real estate loans	$	15,456	$	0	$	0	$	15,456
Commercial business		4,245		0		0		4,245
Loans held for sale, net		24,408		0		24,408		0
Other real estate owned*		6,505		0		0		6,505

*	The balance consists of real estate portfolio segment only.


			Fair Value Measurements at Using
	At December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Assets:
Impaired loans at fair value:
Real estate loans	$	35,009	$	0	$	0	$	35,009
Commercial business		6,611		0		0		6,611
Loans held for sale, net		3,225		0		3,225		0
Other real estate owned*		675		0		0		675

*	The balance consists of real estate portfolio segment only.

Impaired loans, which are measured for impairment using the fair value of the loan collateral, had a carrying amount of $30.4 million at December 31, 2011, after partial charge-offs of $7.3 million. In addition, these loans had a specific valuation allowance of $8.2 million at December 31, 2011. Of this $30.4 million, $28.0 million were carried at their fair value of $19.7 million as a result of the aforementioned charge-offs and specific valuation allowances. The remaining $2.4 million were carried at cost at December 31, 2011, as the fair value of the collateral on these loans exceeded the book value for each individual credit. The Company also has impaired loans totaling $51.7 million at December 31, 2011 which are measured based on the present value of expected cash flows and are not included in the above table as this is not a measurement of fair value. Of these, $45.8 million were carried below cost as a result of charge-offs or assigned specific reserves of $9.9 million at December 31, 2011. The remaining $5.9 million of impaired loans measured based on the present value of expected cash flows are carried at cost. Charge-offs and changes in specific valuation allowances during 2011 on impaired loans carried at the fair value of loan collateral at December 31, 2011 resulted in additional provision for loan losses of $19.6 million.

Impaired loans, which are measured for impairment using the fair value of the loan collateral, had a loan principal balance $94.6 million at December 31, 2010, after partial charge-offs of $20.0 million. In addition, these loans had a specific valuation allowance of $11.2 million at December 31, 2010. Of this $94.6 million, $52.8 million were carried at their fair value of $41.6 million as a result of the aforementioned charge-offs and specific valuation allowances. The remaining $41.8 million were carried at cost at December 31, 2010, as the fair value of the collateral on these loans exceeded the book value for each individual credit. The Company also has impaired loans totaling $28.1 million at December 31, 2010 which are measured based on the present value of expected cash flows and are not included in the above table as this is not a measurement of fair value. Of these, $27.8 million were carried below cost as a result of charge-offs of $4.1 million or assigned specific reserves of $9.9 million at December 31, 2010. The remaining $231 thousand of impaired loans measured based on the present value of expected cash flows are carried at cost. Charge-offs and changes in specific valuation allowances during 2010 on impaired loans carried at the fair value of loan collateral at December 31, 2010 resulted in additional provision for loan losses of $ 43.2 million.

Other real estate owned carried at its fair value had a carrying amount of $6.5 million at December 31, 2011, which is made up of an outstanding balance of $7.5 million, with a valuation allowance of $1.0 million. Changes in the valuation allowance on other real estate owned outstanding at December 31, 2011 resulted in a write-down of $3.2 million during 2011.

Other real estate owned carried at its fair value had a carrying amount of $675 thousand at December 31, 2010, which is made up of an outstanding balance of $1.1 million, with a valuation allowance of $439 thousand. Changes in the valuation allowance on other real estate owned outstanding at December 31, 2010 resulted in a write-down of $2.2 million during 2010.

Loans held for sale, which were carried at their fair value, approximated $24.4 million, after partial charge-offs of $3.0 million and a valuation allowance of $0. Total charge-offs on loans held for sale were $16.1 million during 2011.

Loans held for sale, which were carried at their fair value, approximated $3.2 million, after partial charge-offs of $1.3 million and a valuation allowance of $100 thousand. Total charge-offs on loans held for sale were $33.8 million during 2010.

Fair Value of Financial Instruments

Carrying amounts and estimated fair values of financial instruments, not previously presented, at years ended December 31 were as follows:,


	December 31, 2011
	Carrying Amount			Estimated Fair Value
	(In thousands)
Financial Assets:
Cash and cash equivalents	$	300,110		$	300,110
Term federal funds sold		40,000			40,000
Loans held for sale		18,000			19,374
Loans receivable—net		3,657,173			3,909,721
Federal Home Loan Bank stock		27,373			N/A
Accrued interest receivable		13,439			13,439
Customers' liabilities on acceptances		10,515			10,515
FDIC loss share receivable		10,819			10,819

Financial Liabilities:
Noninterest-bearing deposits	$	(984,350	)	$	(984,350	)
Saving and other interest bearing demand deposits		(1,435,441	)		(1,435,441	)
Time deposits		(1,521,101	)		(1,532,152	)
Borrowings from Federal Home Loan Bank		(344,402	)		(349,311	)
Subordinated debentures		(52,102	)		(53,757	)
Accrued interest payable		(6,519	)		(6,519	)
Bank's liabilities on acceptances outstanding		(10,515	)		(10,515	)


	December 31, 2010
	Carrying Amount			Estimated Fair Value
	(In thousands)
Financial Assets:
Cash and cash equivalents	$	172,331		$	172,331
Loans held for sale		23,702			25,364
Loans receivable—net		2,043,806			2,076,384
Federal Reserve Bank stock		6,367			N/A
Federal Home Loan Bank stock		17,717			N/A
Accrued interest receivable		8,648			8,648
Customers' liabilities on acceptances		11,528			11,528

Financial Liabilities:
Noninterest-bearing deposits	$	(388,731	)	$	(388,731	)
Saving and other interest bearing demand deposits		(814,848	)		(814,848	)
Time deposits		(972,535	)		(977,762	)
Borrowings from Federal Home Loan Bank		(350,000	)		(365,167	)
Subordinated debentures		(39,268	)		(39,649	)
Secured borrowing		(11,758	)		(11,758	)
Accrued interest payable		(4,830	)		(4,830	)
Bank's liabilities on acceptances outstanding		(11,528	)		(11,528	)

The methods and assumptions used to estimate fair value are described as follows.

The carrying amount is the estimated fair value for cash and cash equivalents, savings and other interest bearing demand deposits, accrued interest receivable and payable, customer's and Bank's liabilities on acceptances, non-interest-bearing deposits, short-term debt, secured borrowings, and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns. Fair value of loans held for sale is based on market quotes. The fair value of the FDIC loss share receivable is based on the discounted value of expected future cash flows under the loss sharing agreement with the FDIC. Fair value of time deposits and debt is based on current rates for similar financing. It was not practicable to determine the fair value of Federal Reserve Bank stock or Federal Home Loan Bank stock due to restrictions placed on their transferability. The fair value of commitments to fund loans represents fees currently charged to enter into similar agreements with similar remaining maturities and is not presented herein. The fair value of these financial instruments is not material to the consolidated financial statements.