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Fair Value Disclosures
9 Months Ended
Sep. 30, 2011
Fair Value Disclosures [Abstract] 
Fair Value Disclosures

7. Fair Value Disclosures

The Company groups its financial assets and liabilities measured at fair value in three levels as required by the ASC 820, Fair Value Measurements and Disclosures. Under this guidance, fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the inputs used to develop those assumptions and measure fair value. The hierarchy requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

•  

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

•  

Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

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Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

An asset or liability's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Management reviews and updates the fair value hierarchy classifications of the Company's assets and liabilities on a quarterly basis.

Recurring Basis

Investment Securities Available for Sale

Fair values of investment securities available for sale were primarily measured using information from a third-party pricing service. This pricing service provides pricing information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data from market research publications. If quoted prices were available in an active market, investment securities were classified as Level 1 measurements. If quoted prices were not available in an active market, fair values were estimated primarily by the use of pricing models. Level 2 investment securities were primarily comprised of mortgage-backed securities issued by government agencies and U.S. government-sponsored enterprises. In certain cases where there were limited or less transparent information provided by the Company's third-party pricing service, fair value was estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes. Investment securities are classified within Level 3 when little or no market activity supports the fair value.

Management primarily identifies investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume and frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. Investment securities that are deemed to have been trading in illiquid or inactive markets may require the use of significant unobservable inputs. For example, management may use quoted prices for similar investment securities in the

absence of a liquid and active market for the investment securities being valued. As of September 30, 2011, management did not make adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets.

The following tables present the balances of assets and liabilities measured on a recurring basis as of September 30, 2011 and December 31, 2010.

 

            Fair Value Measurements Using  

(dollars in thousands)

    September 30,
2011		      Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)		      Significant
Other
Observable
Inputs
(Level 2)		      Significant
Unobservable
Inputs
(Level 3)		  

Securities available for sale:

            

U.S. agency mortgage-backed

    $ 126,205       $ —         $ 126,205       $ —     

Non-U.S. agency mortgage-backed

      14,249         —           14,249         —     

Municipal bonds

      11,989         —           11,989         —     

U.S. government agency

      13,071         —           13,071         —     
  

 

 

     

 

 

     

 

 

     

 

 

  

Total

    $ 165,514       $ —         $ 165,514       $ —     
  

 

 

     

 

 

     

 

 

     

 

 

  

 

            Fair Value Measurements Using  

(dollars in thousands)

    December 31,
2010		      Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)		      Significant
Other
Observable
Inputs
(Level 2)		      Significant
Unobservable
Inputs
(Level 3)		  

Securities available for sale:

            

U.S. agency mortgage-backed

    $ 85,335       $ —         $ 85,335       $ —     

Non-U.S. agency mortgage-backed

      20,451         —           17,216         3,235   

U.S. government agency

      6,176         —           6,176         —     
  

 

 

     

 

 

     

 

 

     

 

 

  

Total

    $ 111,962       $ —         $ 108,727       $ 3,235   
  

 

 

     

 

 

     

 

 

     

 

 

  

The Company did not record any liabilities at fair value for which measurement of the fair value was made on a recurring basis.

The following table reconciles assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

 

(dollars in thousands)

    Non-U.S. agency
mortgage-backed
securities		  

Balance at beginning of year

    $ 3,235   

Total gains or losses (realized/unrealized)

   

Included in earnings

      25   

Included in other comprehensive income

      41   

Principal payments

      (203 ) 

Sales

      (3,098 ) 

Transfers in and/or out of Level 3

      —     
  

 

 

  

Balance as of September 30, 2011

    $ —     
  

 

 

  

The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held as of September 30, 2011

    $ —     
  

 

 

  

 

Nonrecurring Basis

The Company has segregated all financial assets and liabilities that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below.

 

            Fair Value Measurements Using  

(dollars in thousands)

    September 30,
2011		      Quoted Prices in
Active Markets for
Identical Assets
(Level 1)		      Significant Other
Observable
Inputs
(Level 2)		      Significant
Unobservable
Inputs
(Level 3)		  

Assets

            

Loans, covered by loss sharing agreements

    $ 67,296       $ —         $ —         $ 67,296   

Impaired loans

      4,629         —           4,629         —     

Repossessed assets

      8,561         —           8,561         —     

FDIC loss sharing receivable

      25,628         —           —           25,628   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total

    $ 106,114       $ —         $ 13,190       $ 92,924   
  

 

 

     

 

 

     

 

 

     

 

 

  

Liabilities

            

Deposits acquired through business combination

    $ 139,332       $ —         $ —         $ 139,332   
  

 

 

     

 

 

     

 

 

     

 

 

  

 

            Fair Value Measurements Using  

(dollars in thousands)

    December 31, 2010      Quoted Prices in
Active Markets for
Identical Assets
(Level 1)		      Significant Other
Observable
Inputs
(Level 2)		      Significant
Unobservable
Inputs
(Level 3)		  

Assets

            

Loans, covered by loss sharing agreements

    $ 80,447       $ —         $ —         $ 80,447   

Impaired loans

      1,296         —           1,296         —     

Repossessed assets

      5,683         —           5,683         —     

FDIC loss sharing receivable

      32,013         —           —           32,013   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total

    $ 119,439       $ —         $ 6,979       $ 112,460   
  

 

 

     

 

 

     

 

 

     

 

 

  

Liabilities

            

Deposits acquired through business combination

    $ 67,466       $ —         $ —         $ 67,466   
  

 

 

     

 

 

     

 

 

     

 

 

  

In accordance with the provisions of ASC 310, Receivables, the Company records loans considered impaired at their fair value. A loan is considered impaired if it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Fair value is measured at the fair value of the collateral for collateral-dependent loans. Impaired loans are classified as Level 2 assets when measured using appraisals from external parties of the collateral less any prior liens. Impaired loans are classified as Level 3 when an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price. Repossessed assets are initially recorded at fair value less estimated costs to sell. The fair value of repossessed assets is based on property appraisals and an analysis of similar properties available. As such, the Company classifies repossessed assets as Level 2 assets. Repossessed assets are classified as Level 3 assets when an appraised value is not available or management determines the fair value of the property is further impaired below the appraised value and there is no observable market price.

 

Certain assets and liabilities measured on a nonrecurring basis using significant unobservable inputs (Level 3) were acquired as part of the Statewide Bank and GSFC acquisitions. These assets and liabilities were recorded at their fair value upon acquisition in accordance with generally accepted accounting principles.

ASC 820 requires the disclosure of each class of financial instruments for which it is practicable to estimate. The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. ASC 820 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

The carrying value of cash and cash equivalents and interest-bearing deposits in banks approximate their fair value.

The fair value for investment securities is determined from quoted market prices when available. If a quoted market price is not available, fair value is estimated using third-party pricing services or quoted market prices of securities with similar characteristics.

The fair value of mortgage loans held for sale and loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturity.

The fair value for cash surrender value of bank-owned life insurance is based on cash surrender values indicated by the insurance companies.

The fair value of demand deposits, savings and interest-bearing demand deposits is the amount payable on demand. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for certificates of similar remaining maturities.

The carrying amount of FHLB advances is estimated using the rates currently offered for advances of similar maturities.

The fair value of off-balance sheet financial instruments as of September 30, 2011 was immaterial.

 

The following table presents estimated fair values of the Company's financial instruments as of the dates indicated.

 

     September 30, 2011      December 31, 2010  

(dollars in thousands)

    Carrying
Amount		      Fair
Value		      Carrying
Amount		      Fair
Value		  

Financial Assets

            

Cash and cash equivalents

    $ 32,917       $ 32,917       $ 36,971       $ 36,971   

Interest-bearing deposits in banks

      6,318         6,318         7,867         7,867   

Investment securities available for sale

      165,514         165,514         111,962         111,962   

Investment securities held to maturity

      3,939         4,063         15,220         15,400   

Mortgage loans held for sale

      8,928         8,928         2,437         2,437   

Loans, net

      649,106         673,841         435,992         449,061   

Cash surrender value of bank-owned life insurance

      16,629         16,629         16,193         16,193   

Financial Liabilities

            

Deposits

    $ 719,460       $ 721,538       $ 553,218       $ 555,250   

Short-term FHLB advances

      72,332         72,332         —           —     

Long-term FHLB advances

      41,126         42,676         13,000         13,305