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Fair Value Measurement | 3 Months Ended
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Dec. 31, 2011
Fair Value Measurement |
Fair Value Measurement |
12. | FAIR VALUE MEASUREMENT
Accounting guidance regarding fair value measurements defines fair value and establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The following definitions describe the categories used in the tables presented under fair value measurement. Quoted prices in active markets for identical assets (Level 1): Inputs that are quoted unadjusted prices in active markets for identical assets that the Company has the ability to access at the measurement date. An active market for the asset is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Other observable inputs (Level 2): Inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity including quoted prices for similar assets, quoted prices for securities in inactive markets and inputs derived principally from or corroborated by observable market data by correlation or other means. Significant unobservable inputs (Level 3): Inputs that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. Financial instruments are broken down in the tables that follow by recurring or nonrecurring measurement status. Recurring assets are initially measured at fair value and are required to be remeasured at fair value in the financial statements at each reporting date. Assets measured on a nonrecurring basis are assets that, as a result of an event or circumstance, were required to be remeasured at fair value after initial recognition in the financial statements at some time during the reporting period. The following table presents assets that are measured at fair value on a recurring basis (in thousands).
|  |  |  |  | Fair value measurements at December 31, 2011, using |
|  | Fair value December 31, 2011 |  |  | Quoted prices in active markets for identical assets (Level 1) |  |  | Other observable inputs (Level 2) |  |  | Significant unobservable inputs (Level 3) |
Investment securities available for sale |  |  |  |  |  |  |  |  |  |  |  |
Trust preferred |  | $ | 1,188 |  |  | $ | - |  |  | $ | - |  |  | $ | 1,188 |
Agency securities |  |  | 5,000 |  |  |  | - |  |  |  | 5,000 |  |  |  | - |
Municipal bonds |  |  | 149 |  |  |  | - |  |  |  | 149 |  |  |  | - |
Mortgage-backed securities available for sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Real estate mortgage investment conduits |  |  | 354 |  |  |  | - |  |  |  | 354 |  |  |  | - |
FHLMC mortgage-backed securities |  |  | 781 |  |  |  | - |  |  |  | 781 |  |  |  | - |
FNMA mortgage-backed securities |  |  | 11 |  |  |  | - |  |  |  | 11 |  |  |  | - |
Total recurring assets measured at fair value |  | $ | 7,483 |  |  | $ | - |  |  | $ | 6,295 |  |  | $ | 1,188 |
The following tables present a reconciliation of assets that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands). There were no transfers of assets in to or out of Level 3 for the nine months ended December 31, 2011 and 2010.
|  | For the Three Months Ended December 31, 2011 |  |  | For the Nine Months Ended December 31, 2011 |  |  | For the Three Months Ended December 31, 2010 |  |  |  | For the Nine Months Ended December 31, 2010 |
|  | Available for sale securities |  |  | Available for sale securities |  |  | Available for sale securities |  |  |  | Available for sale securities |
Beginning balance | $ | 1,179 |  | $ | 916 |  | $ | 965 |  |  | $ | 1,042 |
Transfers in to Level 3 |  | - |  |  | - |  |  | - |  |  |  | - |
Included in earnings (1) |  | - |  |  | - |  |  | - |  |  |  | - |
Included in other comprehensive income |  | 9 |  |  | 272 |  |  | (86 | ) |  |  | (163 | )
Ending balance | $ | 1,188 |  | $ | 1,188 |  | $ | 879 |  |  | $ | 879 |
(1) Included in other non-interest income |  |  |  |  |  |  |  |  |  |  |  |  |
The following method was used to estimate the fair value of each class of financial instrument above: Investments and Mortgage-Backed Securities – Investment securities available-for-sale are included within Level 1 of the hierarchy when quoted prices in an active market for identical assets are available. The Company uses a third party pricing service to assist the Company in determining the fair value of its Level 2 securities, which incorporates pricing models and/or quoted prices of investment securities with similar characteristics. Level 3 assets consist of a single pooled trust preferred security. The Company has determined that the market for its single pooled trust preferred security was inactive. This determination was made by the Company after considering the last known trade date for this specific security, the low number of transactions for similar types of securities, the low number of new issuances for similar securities, the significant increase in the implied liquidity risk premium for similar securities, the lack of information that is released publicly and discussions with third-party industry analysts. Due to the inactivity in the market, observable market data was not readily available for many of the significant inputs for this security. Accordingly, the pooled trust preferred security was classified as Level 3 in the fair value hierarchy. The Company utilized observable inputs where available, unobservable data and modeled the cash flows adjusted by an appropriate liquidity and credit risk adjusted discount rate using an income approach valuation technique in order to measure the fair value of the security. Significant unobservable inputs were used that reflect the Company’s assumptions of what a market participant would use to price the security. Significant unobservable inputs included selecting an appropriate discount rate, default rate and repayment assumptions. The Company estimated the discount rate by comparing rates for similarly rated corporate bonds, with additional consideration given to market liquidity. The default rates and repayment assumptions were estimated based on the individual issuer’s financial conditions, historical repayment information, as well as our future expectations of the capital markets. The following table represents certain loans and real estate owned (“REO”) which were marked down to their fair value using fair value measures for the nine months ended December 31, 2011. The following are assets that are measured at fair value on a nonrecurring basis (in thousands).
|  |  |  | Fair value measurements at December 31, 2011, using |
| Fair value December 31, 2011 |  | Quoted prices in active markets for identical assets (Level 1) |  | Other observable inputs (Level 2) |  | Significant unobservable inputs (Level 3) |
Impaired loans |  | $ | 48,556 |  |  | $ | - |  |  | $ | - |  |  | $ | 48,556 |
Real estate owned |  |  | 14,144 |  |  |  | - |  |  |  | - |  |  |  | 14,144 |
Total nonrecurring assets measured at fair value |  | $ | 62,700 |  |  | $ | - |  |  | $ | - |  |  | $ | 62,700 |
The following method was used to estimate the fair value of each class of financial instrument above: 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. For information regarding the Company’s method for estimating the fair value of impaired loans, see Note 8– Allowance For Loan Losses. Real estate owned – REO is real property that the Bank has taken ownership of in partial or full satisfaction of a loan or loans. REO is recorded at the lower of the carrying amount of the loan or fair value less estimated costs to sell. This amount becomes the property’s new basis. Any write downs based on the property’s fair value less estimated costs to sell at the date of acquisition are charged to the allowance for loan losses. Management periodically reviews REO in an effort to ensure the property is carried at the lower of its new basis or fair value, net of estimated costs to sell.

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