Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

NOTE 10. Fair Value Measurements

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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. There are three levels of inputs that may be used to measure fair values:

Level 1: Valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds that allow the Company to sell its ownership interest back to the fund at net asset value on a daily basis. Valuations are obtained from readily available pricing sources for market transactions involving identical assets, liabilities, or funds.

Level 2: Valuations for assets and liabilities traded in less active dealer, or broker markets, such as quoted prices for similar assets or liabilities or quoted prices in markets that are not active.

Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

The Company used the following methods and significant assumptions to estimate fair value:

Investment Securities Available for Sale and Held to Maturity: The fair value of all investment securities are based upon the assumptions market participants would use in pricing the security. If available, investment securities are determined by quoted market prices (Level 1). For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar securities (Level 2). Level 2 includes U.S. Treasury, U.S. government and agency debt securities, municipal securities, corporate securities and mortgage-backed securities. For investment securities where quoted prices or market prices of similar securities are not available, fair values are calculated by using observable and unobservable inputs such as discounted cash flows or other market indicators (Level 3). Security valuations are obtained from third party pricing services for comparable assets or liabilities.

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on 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 independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business (Level 3). Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on 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 independent appraisers to adjust for differences between the comparable sales and income data available (Level 3).

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers for commercial properties or certified residential appraisers for residential properties whose qualifications and licenses have been reviewed and verified by the Company. Once received, the Company reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On a quarterly basis, the Company compares the actual selling price of collateral that has been liquidated to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.

The following table summarizes the balances of assets measured at fair value on a recurring basis at September 30, 2012.

	Total		Level 1		Level 2		Level 3
	(In thousands)
Investment Securities Available for Sale:
U.S. Treasury and U.S. Government-sponsored agencies	$	22,083	$	—	$	22,083	$	—
Municipal securities		39,939		—		39,939		—
Corporate securities		2,008		—		2,008		—
Mortgage backed securities and collateralized mortgage obligations - residential:
U.S Government-sponsored agencies		83,652		—		83,652		—
Total	$	147,682	$	—	$	147,682	$	—

There were no transfers between Level 1 and Level 2 during the three or nine months ended September 30, 2012.

The following table summarizes the balances of assets measured at fair value on a recurring basis at December 31, 2011.

	Total		Level 1		Level 2		Level 3
	(In thousands)
Investment Securities Available for Sale:
U.S. Treasury and U.S. Government-sponsored agencies	$	31,307	$	—	$	31,307	$	—
Municipal securities		33,423		—		33,423		—
Corporate securities		8,097		—		8,097		—
Mortgage backed securities and collateralized mortgage obligations – residential
U.S Government-sponsored agencies		71,775		—		71,775		—
Total	$	144,602	$	—	$	144,602	$	—

There were no transfers between Level 1 and Level 2 during the year ended December 31, 2011.

The Company may be required to measure certain financial assets and liabilities at fair value on a nonrecurring basis. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The tables below represent assets measured at fair value on a nonrecurring basis during the nine months ended September 30, 2012 and the year ended December 31, 2011 that were still held in the balance sheet at the end of such periods.

	Basis (1)		Fair Value at September 30, 2012
			Total		Level 1		Level 2		Level 3		Net Losses Recorded in Earnings During the Three Months Ended September 30, 2012			Net Losses Recorded in Earnings During the Nine Months Ended September 30, 2012
Impaired originated loans:
Commercial business	$	13,131	$	10,933	$	—	$	—	$	10,933	$	1,041		$	1,361
One-to-four family residential		849		796		—		—		796		(23	)		75
Real estate construction and land development		7,665		5,810		—		—		5,810		(62	)		447
Total impaired originated loans		21,645		17,539		—		—		17,539		956			1,883
Investment securities held to maturity:
Mortgage back securities and collateralized mortgage obligations – residential:
Private residential collateralized mortgage obligations		69		61		—		61		—		—			60
Other real estate owned		2,026		1,616		—		—		1,616		—			310
Total	$	23,740	$	19,216	$	—	$	61	$	19,155	$	956		$	2,253

(1) Basis represents the unpaid principal balance of impaired originated loans, amortized cost of investment securities held to maturity, and carrying value at ownership date of other real estate owned.

	Basis (1)		Fair Value at December 31, 2011
			Total		Level 1		Level 2		Level 3		Net Losses Recorded in Earnings During the Year Ended December 31, 2011
Impaired originated loans:
Commercial business	$	12,058	$	9,741	$	—	$	—	$	9,741	$	1,656
One-to-four family residential		835		648		—		—		648		187
Real estate construction and land development		13,600		11,633		—		—		11,633		2,677
Total impaired originated loans		26,493		22,022		—		—		22,022		4,520
Investment securities held to maturity:
Mortgage back securities and collateralized mortgage obligations – residential:
Private residential collateralized mortgage obligations		191		106		—		106		—		98
Other real estate owned		594		494		—		—		494		99
Total	$	27,278	$	22,622	$	—	$	106	$	22,516	$	4,717

(1) Basis represents the unpaid principal balance of impaired originated loans, amortized cost of investment securities held to maturity, and carrying value at ownership date of other real estate owned.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the date indicated.

	September 30, 2012
	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
	(Dollars in thousands)
Impaired originated loans	$	9,620	Market approach	Adjustment for differences between the comparable sales	1.6% - 100.0% (29.2%)
Other real estate owned	$	1,616	Market approach	Adjustment for differences between the comparable sales	16.2%-31.0% (18.5%)

Because broadly traded markets do not exist for most of the Company’s financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.

The tables below present the carrying value amount of the Company’s financial instruments and their corresponding estimated fair values at the dates indicated.

	September 30, 2012
			Fair Value Measurements Using:
	Carrying Value		Total		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets:
Cash on hand and in banks	$	34,257	$	34,257	$	34,257	$	—	$	—
Interest earning deposits		82,648		82,648		82,648		—		—
Investment securities available for sale		147,682		147,682		—		147,682		—
Investment securities held to maturity		10,833		11,773		—		11,773		—
FHLB stock		5,545		N/A		N/A		—		—
Loans held for sale		1,411		1,411		—		—		1,411
Loans receivable, net of allowance		1,006,023		1,025,402		—		—		1,025,402
Accrued interest receivable		5,178		5,178		13		871		4,294
Financial Liabilities:
Deposits:
Non-interest deposits, NOW accounts, money market accounts, savings accounts	$	838,574	$	837,575	$	837,575	$	—	$	—
Certificate of deposit accounts		295,126		297,766		—		—		297,766
Total deposits	$	1,133,700	$	1,135,341	$	837,575	$	—	$	297,766
Securities sold under agreement to repurchase	$	22,889	$	22,889	$	22,889	$	—	$	—
Accrued interest payable	$	122	$	122	$	19	$	—	$	103

	December 31, 2011
	Carrying Value		Fair Value
	(In thousands)
Financial Assets:
Cash on hand and in banks	$	30,193	$	30,193
Interest earning deposits		93,566		93,566
Investment securities available for sale		144,602		144,602
Investment securities held to maturity		12,093		12,881
FHLB stock		5,594		N/A
Loans held for sale		1,828		1,828
Loans receivable, net of allowance		1,004,480		1,027,495
Accrued interest receivable		5,117		5,117
Financial Liabilities:
Deposits:
Non-interest deposits, NOW accounts, money market accounts, savings accounts	$	806,440	$	806,440
Certificate of deposit accounts		329,604		331,618
Total deposits	$	1,136,044	$	1,138,058
Securities sold under agreement to repurchase	$	23,091	$	23,091
Accrued interest payable	$	180	$	180

The methods and assumptions, not previously presented, used to estimate fair value are described as follows:

Cash on Hand and in Banks and Interest Earning Deposits: The fair value of financial instruments that are short-term or reprice frequently and accrued interest receivable and payable that have little or no risk are considered to have a fair value equal to carrying value (Level 1).

FHLB Stock: FHLB of Seattle stock is not publicly traded, as such, it is not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Loans Receivable and Loans Held for Sale: Fair value is based on discounted cash flows using current market rates applied to the estimated life (Level 3). While these methodologies are permitted under U.S. GAAP, they are not based on the exit price concept of the fair value required under ASC 820-10, Fair Value Measurements and Disclosures, and generally produces a higher value.

Accrued Interest Receivable/Payable: The fair value of accrued interest receivable/payable balances are determined using inputs and fair value measurements commensurate with the asset from which the accrued interest is generated. The carrying amounts of accrued interest approximate fair value (Level 1, Level 2, and Level 3).

Deposits: For deposits with no contractual maturity, the fair value is assumed to equal the carrying value (Level 1). The fair value of fixed maturity deposits is based on discounted cash flows using the difference between the deposit rate and the rates offered by the Company for deposits of similar remaining maturities (Level 3).

Securities Sold Under Agreement to Repurchase: Securities sold under agreement to repurchase are short-term in nature, repricing on a daily basis. Fair value financial instruments that are short-term or reprice frequently and that have little or no risk are considered to have a fair value equal to carrying value (Level 1).

Off-Balance Sheet Financial Instruments: The majority of our commitments to extend credit, standby letters of credit and commitments to sell mortgage loans carry current market interest rates if converted to loans, as such, no premium or discount was ascribed to these commitments (Level 1).