Fair Value Measurements

6 Months Ended

Jun. 30, 2011

Fair Value Measurements

Note 7 – Fair Value Measurements

ASC 820-10 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 guidance 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.

As discussed in Note 2, due to the deconsolidation of the Bank during the second quarter of 2011, the Company had no assets or liabilities measured at fair value on a recurring or non recurring basis as of June 30, 2011.

Valuation of Securities Available for Sale

The fair values of securities available for sale are determined by: 1) obtaining quoted prices on nationally recognized securities exchanges when available (Level 1 inputs); 2) matrix pricing, which is a mathematical technique widely used in the financial markets 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); and 3) for collateralized debt obligations and certain other assets and liabilities recorded at fair value in connection with the application of the acquisition method of accounting, custom discounted cash flow modeling (Level 3 inputs).

As of December 31, 2010, the Company owned a collateralized debt security where the underlying collateral is comprised primarily of trust preferred securities of banks and insurance companies. The inputs used in determining the estimated fair value of this security are Level 3 inputs. In determining its estimated fair value, management utilizes a discounted cash flow modeling valuation approach. Discount rates utilized in the modeling of this security are estimated based upon a variety of factors including the market yields of publicly traded trust preferred securities of larger financial institutions and other non-investment grade corporate debt. Cash flows utilized in the modeling of this security were based upon actual default history of the underlying issuers and issuer specific assumptions of estimated future defaults of the underlying issuers.

Valuation of Impaired Loans and Other Real Estate Owned

The fair value of collateral dependent impaired loans with specific allocations of the allowance for loan losses and other real estate owned is generally based on recent real estate appraisals and other available observable market information. 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 a Level 3 classification of the inputs for determining fair value.

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 are summarized below:

(Successor Company)			Fair Value Measurements at December 31, 2010 Using
	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:
U.S. Government agencies and corporations	$	40,699	$	-	$	40,699	$	-
States and political subdivisions—tax exempt		3,059		-		3,059		-
States and political subdivisions—taxable		2,157		-		2,157		-
Marketable equity securities		74		74		-		-
Mortgage-backed securities—residential		369,203		-		369,203		-
Corporate bonds		2,105		-		2,105		-
Collateralized debt obligations		795		-		-		795
Available for sale securities	$	418,092	$	74	$	417,223	$	795

The tables below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2010 and held at June 30, 2010, respectively.

(Predecessor Company)	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Collateralized Debt Obligations
	Three months Ended June 30, 2010			Six months Ended June 30, 2010
Balance, beginning of period	$	769		$	759
Included in earnings – other than temporary impairment		-			-
Included in other comprehensive income		(11	)		(1	)
Transfer in to Level 3		-			-
Balance, end of period	$	758		$	758

Assets and Liabilities Measured on a Non-Recurring Basis

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

(Successor Company)			Fair Value Measurements at December 31, 2010 Using
	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:
Other real estate owned		25,673		-		-		25,673
Other repossessed assets		104		-		104		-

The carrying amounts and estimated fair values of financial instruments, at June 30, 2011 and December 31, 2010 are as follows:

	June 30, 2011				December 31, 2010
(Successor Company)	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	6,145	$	6,145	$	153,794	$	153,794
Investment securities available for sale		-		-		418,092		418,092
Loans, net		-		-		1,004,228		995,744
Federal Home Loan Bank and Independent Bankers’ Bank stock		-		-		9,621	NM
Accrued interest receivable		-		-		4,917		4,917
Financial liabilities:
Non-contractual deposits	$	-	$	-	$	648,019	$	648,019
Contractual deposits		-		-		719,006		719,328
Federal Home Loan Bank Advances		-		-		131,116		130,906
Short-term borrowings		-		-		47,158		47,156
Subordinated debentures		23,031		23,240		22,887		25,267
Accrued interest payable		2,904		2,904		7,260		7,260

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

Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, non contractual which consists of demand deposits and deposits that reprice frequently and fully.  The methods for determining the fair values for securities were described previously.  For loans, contractual deposits, which consist of deposits with infrequent repricing or repricing limits and debt, fair value is based on discounted cash flows using current market rates. It was not practicable to determine the fair value of FHLB and IBB stock due to restrictions placed on their transferability.  The fair value of off balance sheet items is not considered material.