Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

 v2.3.0.11
Fair Value Measurements
 6 Months Ended
Jun. 30, 2011
Fair Value Measurements [Abstract]  
FAIR VALUE MEASUREMENTS
NOTE 3 — FAIR VALUE MEASUREMENTS
Fair Value Option and Fair Value Measurements
     We determine the fair value of our assets and liabilities in accordance with ASC 820, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The fair value of an asset or liability is determined based on 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. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for market activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact for the asset or liability.
     In determining fair value, we use various methods including market and income approaches. Based on these approaches, we utilize certain assumptions that market participants would use in pricing the asset or liability. These inputs can be readily observable, market corroborated, or generally unobservable inputs. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, we classify and disclose assets and liabilities based on the fair value hierarchy presented below. The hierarchy is based on the quality and reliability of the information used to determine fair values. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to data lacking transparency.
     In January 2010, the FASB issued ASU No. 2010-6, Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements. This requires (i) fair value disclosures by each class of assets and liabilities (generally a subset within a line item as presented in the statement of financial position) rather than major category, (ii) for items measured at fair value on a recurring basis, the amounts of significant transfers between Levels 1 and 2, and transfers into and out of Level 3, and the reasons for those transfers, including separate discussion related to the transfers into each level apart from transfers out of each level, and (iii) gross presentation of the amounts of purchases, sales, issuances, and settlements in the Level 3 recurring measurement reconciliation. Additionally, the ASU clarifies that a description of the valuation techniques(s) and inputs used to measure fair values is required for both recurring and nonrecurring fair value measurements. In addition, if a valuation technique has changed, entities should disclose that change and the reason for the change. Disclosures other than the gross presentation changes in the Level 3 reconciliation were effective for the first reporting period beginning after December 31, 2009. The requirement to present the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis was effective for fiscal years beginning after December 15, 2010. The adoption of FASB ASU 2010-06 did not have a material effect on our financial condition or result of operations.
     We used the following methods and significant assumptions to estimate fair value:
     Investment Securities Available for Sale — The fair values of investment securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely 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. The fair values of investment securities are determined by reference to the average of at least two quoted market prices obtained from independent external brokers or independent external pricing service providers who have experience in valuing these securities. In obtaining such valuation information from third parties, we have evaluated the methodologies used to develop the resulting fair values. We perform a monthly analysis on the broker quotes received from third parties to ensure that the prices represent a reasonable estimate of the fair value. The procedures include, but are not limited to, initial and on-going review of third party pricing methodologies, review of pricing trends, and monitoring of trading volumes.
     Level 1 investment securities include U.S. government and agency debentures and equity securities that are traded on an active exchange or by dealers or brokers in active over-the-counter markets. The fair value of these securities is determined by quoted prices on an active exchange or over-the-counter market. Level 2 investment securities primarily include mortgage-backed securities, municipal bonds, collateralized mortgage obligations, and asset-backed securities. In determining the fair value of the securities’ categorized as Level 2, we obtain reports from nationally recognized broker-dealers detailing the fair value of each investment security we hold as of each reporting date. The broker-dealers use observable market information to value our fixed income securities, with the primary sources being nationally recognized pricing services. The fair value of the municipal securities is based on a proprietary model maintained by the broker-dealer. We review the market prices provided by the broker-dealer for our securities for reasonableness based on our understanding of the marketplace. We also consider any credit issues related to the bonds. As we have 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.
     Securities classified as Level 3 investment securities are instruments that are not traded in the market. As such, no observable market data for the instrument is available. This necessitates the use of significant unobservable inputs into our proprietary valuation model. As of June 30, 2011 and December 31, 2010, we had no level 3 investment securities.
     SBA Loans Held for Sale – All Small Business Administration (“SBA”) loans originate for sale. Loans held for sale are carried at the lower of cost or fair value. As of June 30, 2011 and December 31, 2010, we had $24.3 million and $10.0 million of SBA loans held for sale, respectively. Management obtains quotes, bids or pricing indication sheets on all or part of these loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes, bids or pricing indication sheets are indicative of the fact that cost is lower than fair value. At June 30, 2011 and December 31, 2010, the entire balance of the loans held for sale was recorded at its cost on a nonrecurring basis with Level 2 inputs.
     Non-performing Loans Held for Sale – We reclassify certain non-performing loans when we make the decision to sell those loans. The fair value of non-performing loans held for sale is generally based upon the quotes, bids or sales contract prices from buyers. Non-performing loans held for sale are recorded at estimated fair value less anticipated liquidation cost. As of June 30, 2011 and December 31, 2010, we had $19.8 million and $26.6 million of non-performing loans held for sale, respectively, and measured them on a nonrecurring basis with Level 3 inputs.
     Impaired Loans – FASB ASC 820 applies to loans measured for impairment using the practical expedients permitted by FASB ASC 310, “Receivables,” 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 loans are classified as Level 3 and subject to non-recurring fair value adjustments.
     Other Real Estate Owned – Other real estate owned is measured at fair value less selling costs. Fair value was determined based on third-party appraisals of fair value in an orderly sale. Selling costs were based on standard market factors. We classify other real estate owned, which is subject to non-recurring fair value adjustments, as Level 3.
     Servicing Assets and Servicing Liabilities – The fair values of servicing assets and servicing liabilities are based on a valuation model that calculates the present value of estimated net future cash flows related to contractually specified servicing fees. The valuation model incorporates assumptions that market participants would use in estimating future cash flows. The valuation model inputs and results are compared to widely available published industry data for reasonableness. Since fair value measurements of servicing assets and servicing liabilities use significant unobservable inputs, we classify them as Level 3.
     Other Intangible Assets – Other intangible assets consist of a core deposit intangible and acquired intangible assets arising from acquisitions, including non-compete agreements, trade names, carrier relationships and client/insured relationships. The valuation of other intangible assets is based on information and assumptions available to us at the time of acquisition, using income and market approaches to determine fair value. We test our other intangible assets annually for impairment, or when indications of potential impairment exist. Since fair value measurements of other intangible assets use significant unobservable inputs, we classify them, which are subject to non-recurring fair value adjustments, as Level 3.
     Stock Warrants – The fair value of stock warrants was determined by the Black-Scholes option pricing model. The expected stock volatility is based on historical volatility of our common stock over the expected term of the warrants. The expected life assumption is commensurate with the contract term. The dividend yield of zero is determined by the fact that we have no present intention to pay cash dividends. The risk free rate used for the warrant is equal to the zero coupon rate in effect at the time of the grant. As such, we classify them, which are subject to non-recurring fair value adjustments, as Level 3.
Fair Value Measurement
     FASB ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 also establishes a three-level fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are defined as follows:
  •   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, and other inputs that are observable or can be corroborated by observable market data.
 
  •   Level 3  Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
     Fair value is used on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes in accordance with ASC 825, Financial Instruments.
     We record investment securities available for sale at fair value on a recurring basis. Certain other assets, such as loans held for sale, mortgage servicing assets, impaired loans, other real estate owned, and other intangible assets, are recorded at fair value on a non-recurring basis. Non-recurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the re-measurement is performed.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
     We recognize transfers of assets between levels at the end of each respective quarterly reporting period. However, there were no transfers of assets between Level 1 and Level 2 of the fair value hierarchy for the three and six months ended June 30, 2011.
     As of June 30, 2011 and December 31, 2010, assets and liabilities measured at fair value on a recurring basis are as follows:
                                 
    Level 1     Level 2     Level 3        
            Significant                
            Observable                
            Inputs With                
    Quoted Prices in     No Active             Balance as of  
    Active Markets     Market With     Significant     June 30,  
    for Identical     Identical     Unobservable     2011 and December  
    Assets     Characteristics     Inputs     31, 2010  
            (In Thousands)          
June 30, 2011
                               
ASSETS:
                               
Debt Securities Available for Sale:
                               
Collateralized Mortgage Obligations
  $ —     $ 125,929     $ —     $ 125,929  
U.S. Government Agency Securities
    106,325       —       —       106,325  
Residential Mortgage-Backed Securities
    —       117,777       —       117,777  
Corporate Bonds
    —       20,385       —       20,385  
Municipal Bonds
    —       9,256       —       9,256  
Asset-Backed Securities
    —       6,799       —       6,799  
Other Securities
    —       3,281       —       3,281  
 
                       
Total Debt Securities Available for Sale
  $ 106,325     $ 283,427     $ —     $ 389,752  
 
                       
 
                               
Equity Securities Available for Sale:
                               
Financial Services Industry
  $ 460       —       —     $ 460  
 
                       
 
                               
Total Equity Securities Available for Sale
  $ 460     $ —     $ —     $ 460  
 
                       
 
                               
Total Securities Available for Sale
  $ 106,785     $ 283,427     $ —     $ 390,212  
 
                       
 
                               
LIABILITIES:
                               
Stock Warrants
  $ —     $ —     $ 1,289     $ 1,289  
 
                               
December 31, 2010
                               
ASSETS:
                               
Debt Securities Available for Sale:
                               
 
                               
Collateralized Mortgage Obligations
  $ —     $ 137,193     $ —     $ 137,193  
U.S. Government Agency Securities
    113,334       —       —       113,334  
Residential Mortgage-Backed Securities
    —       109,842       —       109,842  
Municipal Bonds
    —       21,028       —       21,028  
Corporate Bonds
    —       20,205       —       20,205  
Asset-Backed Securities
    —       7,384       —       7,384  
Other Securities
    —       3,259       —       3,259  
 
                       
Total Debt Securities Available for Sale
  $ 113,334     $ 298,911     $ —     $ 412,245  
 
                       
 
                               
Equity Securities Available for Sale:
                               
Financial Services Industry
  $ 873       —       —     $ 873  
 
                       
 
                               
Total Equity Securities Available for Sale
  $ 873     $ —     $ —     $ 873  
 
                       
 
                               
Total Securities Available for Sale
  $ 114,207     $ 298,911     $ —     $ 413,118  
 
                       
 
                               
LIABILITIES:
                               
Stock Warrants
  $ —     $ —     $ 1,600     $ 1,600  
     The table below presents a reconciliation and income statement classification of gains and losses for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2011:
                                                 
    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)  
                            Realized and                
                            Unrealized                
    Beginning             Realized and     Gains or Losses             Ending  
    Balance as of     Purchases,     Unrealized     in Other     Transfers     Balance as of  
    March 31,     Issuances and     Gains or Losses     Comprehensive     In and/or Out     June 30,  
    2011     Settlements     in Earnings     Income     of Level 3     2011  
                    (In Thousands)                  
LIABILITIES:
                                               
Stock Warrants(1)
  $ 1,614     $ —     $ 325     $ —     $ —     $ 1,289  
                                                 
                            Realized and                
                            Unrealized                
    Beginning             Realized and     Gains or Losses             Ending  
    Balance as of     Purchases,     Unrealized     in Other     Transfers     Balance as of  
    December 31,     Issuances and     Gains or Losses     Comprehensive     In and/or Out     June 30,  
    2010     Settlements     in Earnings     Income     of Level 3     2011  
                    (In Thousands)                  
LIABILITIES:
                                               
Stock Warrants(1)
  $ 1,600     $ —     $ 311     $ —     $ —     $ 1,289  
 
(1)   Reflects warrants for our common stock issued to Cappello Capital Corp. in connection with services it provided to us as a placement agent in connection with our best efforts public offering and as our financial adviser in connection with our completed rights offering. The warrants were immediately exercisable when issued at an exercise price of $1.20 per share and expire on October 14, 2015. See “Note 8 — Stockholders’ Equity” for more details.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
     For the three and six months ended June 30, 2011 and 2010, assets and liabilities measured at fair value on a non-recurring basis are as follows:
                                         
    Level 1     Level 2     Level 3              
    Quoted Prices in     Significant
Observable
Inputs With
No Active 		            Losses During The     Losses During The  
    Active Markets     Market With     Significant     Three Months Ended     Six Months Ended  
    for Identical     Identical       Unobservable     June 30,     June 30,  
    Assets     Characteristics     Inputs     2011 and 2010     2011 and 2010  
June 30, 2011
                                       
ASSETS:
                                       
Non-Performing Loans Held for Sale
  $ —     $ —     $ 18,683 (1)   $ 682     $ 9,462  
Impaired Loans
  $ —     $ —     $ 178,090 (2)   $ 14,314     $ 23,940  
Other Real Estate Owned
  $ —     $ —     $ 1,298 (3)   $ 203     $ 770  
 
                                       
June 30, 2010
                                       
ASSETS:
                                       
Non-Performing Loans Held for Sale
  $ —     $ —     $ 23,663 (4)   $ 5,337     $ 7,053  
Impaired Loans
  $ —     $ —     $ 168,184 (5)   $ 19,857     $ 48,696  
Other Real Estate Owned
  $ —     $ —     $ 22,499 (6)   $ 966     $ 5,912  
 
(1)   Includes commercial property loans of $418,000, commercial term loans of $12.0 million, SBA loans of $6.0 million and residential property loans of $266,000.
 
(2)   Includes real estate loans of $73.7 million, commercial and industrial loans of $103.7 million, and consumer loans of $732,000 .
 
(3)   Includes properties from the foreclosure of commercial property loans of $308,000 and SBA loans of $990,000.
 
(4)   Includes commercial term loans of $8.8 million and commercial property loans of $14.9 million.
 
(5)   Includes real estate loans of $43.7 million, commercial and industrial loans of $124.1 million, and consumer loans of $388,000.
 
(6)   Includes properties from the foreclosure of real estate loans of $19.4 million, and commercial and industrial loans of $3.1 million.
     FASB ASC 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring basis or non-recurring basis are discussed above.
     The estimated fair value of financial instruments has been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
     The estimated fair values of financial instruments were as follows:
                                 
    June 30, 2011     December 31, 2010  
    Carrying     Estimated     Carrying     Estimated  
    or Contract     Fair     or Contract     Fair  
    Amount     Value     Amount     Value  
            (In Thousands)          
Financial Assets:
                               
Cash and Cash Equivalents
  $ 198,923     $ 198,923     $ 249,720     $ 249,720  
Investment Securities Held to Maturity
    833       835       845       847  
Investment Securities Available for Sale
    390,212       390,212       413,118       413,118  
Loans Receivable, Net of Allowance for Loan Losses
    1,959,564       1,943,118       2,084,447       2,025,368  
Loans Held for Sale
    44,105       44,105       36,620       36,620  
Accrued Interest Receivable
    7,512       7,512       8,048       8,048  
Investment in Federal Home Loan Bank Stock
    25,076       25,076       27,282       27,282  
Investment in Federal Reserve Bank Stock
    7,489       7,489       7,449       7,449  
 
                               
Financial Liabilities:
                               
Noninterest-Bearing Deposits
    600,812       600,812       546,815       546,815  
Interest-Bearing Deposits
    1,797,563       1,807,148       1,919,906       1,927,314  
Borrowings
    86,919       87,017       237,626       233,077  
Accrued Interest Payable
    14,226       14,226       15,966       15,966  
 
                               
Off-Balance Sheet Items:
                               
Commitments to Extend Credit
    167,018       100       178,424       130  
Standby Letters of Credit
    14,771       36       15,226       50  
     The methods and assumptions used to estimate the fair value of each class of financial instruments for which it was practicable to estimate that value are explained below:
     Cash and Cash Equivalents – For short-term instruments, including cash and due from banks, and interest bearing deposits with banks, the carrying amount is a reasonable estimate of fair value.
     Investment Securities – Fair values for investment securities are based on quoted market prices when available or through the use of market prices obtained from independent securities brokers or dealers, when market quotes are not readily accessible or available.
     Loans Receivable, Net of Allowance for Loan Losses – Fair values for loans receivable are estimated based on the discounted cash flow approach. The discount rate is derived from the associated yield curve plus spreads, and reflects the offering rates offered by the Bank for loans with similar financial characteristics. Yield curves are constructed by product type using the Bank’s loan pricing model for like-quality credits. The discount rates used in the Bank’s model represent the rates the Bank would offer to current borrowers for like-quality credits. These rates could be different from what other financial institutions could offer for these loans. No adjustments have been made for changes in credit within the loan portfolio. It is our opinion that the allowance for loan losses relating to performing and nonperforming loans results in a fair valuation of such loans. Additionally, the fair value of our loans may differ significantly from the values that would have been used had a ready market existed for such loans, and may differ materially from the values that we may ultimately realize.
     Loans Held for Sale – For loans held for sale, the carrying value approximates fair value.
    Accrued Interest Receivable – The carrying amount of accrued interest receivable approximates its fair value.
     Investment in Federal Home Loan Bank and Federal Reserve Bank Stock – The carrying amounts approximate fair value as the stock may be resold to the issuer at carrying value.
     Noninterest-Bearing Deposits – The fair value of noninterest-bearing deposits is equal to the amount payable on demand at the reporting date.
     Interest-Bearing Deposits – The fair value of interest-bearing deposits, such as savings accounts, money market checking, and certificates of deposit, is estimated based on the discounted value of contractual cash flows. The cash flows for non-maturity deposits, including savings accounts and money market checking, are estimated based on their historical decaying experiences. The discount rates used for fair valuation are based on interest rates currently being offered by the Bank on comparable deposits as to amount and term.
     Borrowings – Borrowings consist of Federal Home Loan Bank (“FHLB”) advances, junior subordinated debentures and other borrowings. Discounted cash flows are used to value borrowings.
     Accrued Interest Payable – The carrying amount of accrued interest payable approximates its fair value.
     Stock Warrants – The fair value of stock warrants is determined by the Black-Scholes option pricing model. The expected stock volatility is based on historical volatility of our common stock over expected term of the warrants. The expected life assumption is commensurate with the contract term. The dividend yield of zero is determined by the fact that we have no present intention to pay cash dividends. The risk free rate used for the warrant is equal to the zero coupon rate in effect at the time of the grant.
     Commitments to Extend Credit and Standby Letters of Credit – The fair values of commitments to extend credit and standby letters of credit are based upon the difference between the current value of similar loans and the price at which the Bank has committed to make the loans.