Fair Value

12 Months Ended

Dec. 31, 2011

Fair Value [Abstract]

FAIR VALUE

19. FAIR VALUE

Fair value is the exchange price that would be received for an asset if 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 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 beliefs about the assumptions that market participants would use in pricing an asset or liability.

United Community uses the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Available for sale securities: The fair values for available for sale securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

Impaired loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally 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.

Foreclosed assets: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at fair value, less costs to sell. Fair values are based on recent real estate appraisals. These appraisals may use 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.

Mortgage servicing rights: Fair Value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income.

Loans held for sale: The fair value of loans held for sale is determined using quotes prices for similar assets, adjusted for specific attributes of that loan (Level 2).

Letters of Credit: Letters of credit are recorded when they are funded. Home Savings had committments of $1.1 million in letters of credit, with none outstanding at December 31, 2011.

Interest rate caps: Interest rate caps are recorded when they are purchased. Interest rate caps use a model to determine the fair value, which takes into consideration the Company’s own assumptions. Such inputs require a Level 3 classification for determining fair value.

Assets and Liabilities Measured on a Recurring Basis: Assets and liabilities measured at fair value on a recurring basis are summarized below:

		September 30,		September 30,		September 30,		September 30,
			Fair Value Measurements at December 31, 2011 Using:
	December 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2011		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Available for sale securities
US Treasury and government sponsored entities’ securities	$	50,800	$	—	$	50,800	$	—
Equity securities		263		263		—		—
Mortgage-backed GSE securities: residential		408,535		—		408,535		—
Interest rate caps		1,933		—		—		1,933

		September 30,		September 30,		September 30,		September 30,
			Fair Value Measurements at December 31, 2010 Using:
	December 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Available for sale securities
US Treasury and government sponsored entities’ securities	$	62,935	$	—	$	62,935	$	—
Equity securities		394		394		—		—
Mortgage-backed GSE securities: residential		298,713		—		298,713		—

Assets and Liabilities Measured on a Non-Recurring Basis

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

		September 30,		September 30,		September 30,		September 30,
			Fair Value Measurements at December 31, 2011 Using:
	December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets:
Impaired loans:
Permanent real estate loans	$	38,627	$	—	$	—	$	38,627
Construction loans		14,953		—		—		14,953
Consumer loans		282		—		—		282
Commercial loans		291		—		—		291
Mortgage servicing assets		3,921		—		3,921		—
Other real estate owned, net:
Permanent real estate loans		7,586		—		—		7,586
Construction loans		7,581		—		—		7,581

		September 30,		September 30,		September 30,		September 30,
			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)
	(Dollars in thousands)
Assets:
Impaired loans:
Permanent real estate loans	$	49,235	$	—	$	—	$	49,235
Construction loans		20,229		—		—		20,229
Commercial loans		1,694		—		—		1,694
Loans held for sale		10,845		—		10,845		—
Mortgage servicing assets		2,278		—		2,278		—
Other real estate owned, net:
Permanent real estate loans		3,930		—		—		3,930
Construction loans		10,527		—		—		10,527

Impaired loans with specific allocations of the allowance for loan losses, carried at fair value, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $66.0 million at December 31, 2011, with a specific valuation allowance of $11.8 million. This resulted in an additional provision for loan losses of $30.8 million during the twelve months ended December 31, 2011. Impaired loans with specific allocations of the allowance for loan losses, carried at fair value, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $84.6 million at December 31, 2010, with a specific valuation allowance of $13.4 million, resulting in additional provision for loan losses of $47.9 million during 2010.

Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $33.5 million, which is made up of the outstanding balance of $42.3 million, net of a valuation allowance of $8.8 million at December 31, 2011, resulting in a write-down of $4.8 million for the year ended December 31, 2011. At December 31, 2010, other real estate owned had a net carrying amount of $40.3 million, made up of the outstanding balance of $47.7 million, net of a valuation allowance of $7.3 million, resulting in a write-down of $4.6 million for the year ended December 31, 2010.

Mortgage servicing rights, carried at fair value totaled $4.6 million, which is made up of the outstanding balance of $6.4 million, net of a valuation allowance of $1.8 million at December 31, 2011, resulting in a charge net of $1.5 million for the year ended December 31, 2011. At December 31, 2010, mortgage servicing rights carried at fair value totaled $6.1 million, made up of the outstanding balance of $6.4 million, net of a valuation allowance of $285,000, resulting in a net recovery of $138,000 for the year ended December 31, 2010.

In accordance with generally accepted accounting principles, the carrying value and estimated fair values of financial instruments, at December 31, 2011 and December 31, 2010, were as follows:

		September 30,			September 30,			September 30,			September 30,
	December 31, 2011						December 31, 2010
	Carrying			Fair			Carrying			Fair
	Value			Value			Value			Value
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	54,136		$	54,136		$	37,107		$	37,107
Available for sale securities		459,598			459,598			362,042			362,042
Loans held for sale		12,727			13,098			10,870			10,870
Loans, net		1,379,276			1,402,452			1,649,486			1,675,610
Federal Home Loan Bank stock		26,464			n/a			26,464			n/a
Accrued interest receivable		6,741			6,741			7,720			7,720
Interest Rate Caps		1,933			1,933			—			—
Liabilities:
Deposits:
Checking, savings and money market accounts		(817,082	)		(817,082	)		(779,301	)		(779,301	)
Certificates of deposit		(771,415	)		(782,146	)		(910,480	)		(925,325	)
Federal Home Loan Bank advances		(128,155	)		(136,727	)		(202,818	)		(210,497	)
Repurchase agreements and other		(90,618	)		(103,719	)		(97,797	)		(107,299	)
Advance payments by borrowers for taxes and insurance		(23,282	)		(23,282	)		(20,668	)		(20,668	)
Accrued interest payable		(610	)		(610	)		(809	)		(809	)

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

Carrying amount is the estimated fair value for cash and cash equivalents, interest bearing deposits, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk (including consideration of credit spreads). Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. The fair value of off-balance sheet items is not consider material.