Fair Value Measurement

6 Months Ended

Jun. 30, 2012

Fair Value Measurement [Abstract]

FAIR VALUE MEASUREMENT

10. FAIR VALUE MEASUREMENT

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 of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).

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, resulting in a Level 3 fair value classification. 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. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

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, a member of the Special Assets Department 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 an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.

Mortgage servicing rights: On a quarterly basis, loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value. Fair value is determined at a tranche level, based on market prices for comparable mortgage servicing contracts (Level 1), when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2).

Loans held for sale: Loans held for sale are carried at the lower of cost or fair value, which is evaluated on a pool-level basis. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).

Interest rate caps: The Company uses an independent third party that performs a market valuation analysis for interest rate caps. The methodology used consists of a discounted cash flow model, all future floating cash flows are projected and both floating and fixed cash flows are discounted to the valuation date. The curve utilized for discounting and projecting is built by obtaining publicly available third party market quotes from Reuters, which handle up to 30-year swap maturities (Level 3).

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

			Fair Value Measurements at June 30, 2012 Using:
	June 30,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2012		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Available for sale securities
US Treasury and government sponsored entities’ securities	$	54,123	$	—	$	54,123	$	—
Equity securities		276		276		—		—
Mortgage-backed GSE securities: residential		376,641		—		376,641		—
Interest rate caps		831		—		—		831
			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

There were no transfers between Level 1 and Level 2 during 2012 or 2011.

The table below presents a reconciliation of 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, 2012:

	Interest Rate Caps
	Three Months Ended June 30, 2012			Six Months Ended June 30, 2012
Balance of recurring Level 3 assets at January 1	$	1,646		$	1,933
Total gains (losses) for the period
Included in other income		(686	)		(843	)
Included in other comprehensive income		—			—
Purchases		—			—
Amortization		(129	)		(259	)
Sales		—			—
Balance of recurring Level 3 assets at end of period	$	831		$	831

The Company had no interest rate caps as of June 30, 2011.

There were no transfers between Level 2 and Level 3 during 2012 or 2011.

The following table presents quantitative information about recurring Level 3 fair value measurements at June 30, 2012:

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
Interest rate caps	$	831	Discounted cash flow	Discount rate	0.47%-1.5%

The fair value of interest rate caps was determined using proprietary models from third-party sources taking into account such factors as size of the transaction, the lack of a quoted market and the custom-tailored nature of the transaction. The fair value is inclusive of interest accruals, as applicable.

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

			Fair Value Measurements at June 30, 2012 Using:
	June 30,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2012		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired loans:
Permanent real estate loans	$	30,429	$	—	$	—	$	30,429
Construction loans		10,900		—		—		10,900
Consumer loans		17						17
Commercial loans		400		—		—		400
Mortgage servicing assets		4,358		—		4,358		—
Other real estate owned, net:
Permanent real estate loans		4,753		—		—		4,753
Construction loans		5,877		—		—		5,877
			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:
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

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 $48.8 million at June 30, 2012, with a specific valuation allowance of $7.0 million. This resulted in an increase of the provision for loan losses of $2.1 million during the three months ended June 30, 2012 and an increase of the provision for loan losses of $1.5 million during the six months ended June 30, 2012. 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 $80.0 million at June 30, 2011, with a specific valuation allowance of $11.7 million. This resulted in an additional provision for loan losses of $7.0 million during the three months ended June 30, 2011 and $12.6 million for the six months ended June 30, 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 $66.0 million at December 31, 2011, with a specific valuation allowance of $11.8 million, resulting in additional provision for loan losses of $30.8 million during 2011.

The significant unobservable (Level 3) inputs used in the fair value measurement of collateral for collateral dependent impaired loans included in the above table primarily relate to the adjustment between carrying value versus appraised value. During the reported periods, discounts applied to appraisals for estimated selling costs were 10%.

At June 30, 2012, mortgage servicing rights, carried at fair value, totaled $4.9 million, which is made up of the outstanding balance of $6.3 million, net of a valuation allowance of $1.3 million. At December 31, 2011, mortgage servicing rights, carried at fair value, totaled $4.6 million, which was made up of the outstanding balance of $6.4 million, net of a valuation allowance of $1.8 million, resulting in a net charge of $1.5 million for the year ended December 31, 2011. During the second quarter, the Company increased the amount of the valuation allowance by $507,000. Mortgage servicing rights are valued by an independent third party that is active in purchasing and selling these instruments. The value reflects the characteristics of the underlying loans discounted at a market multiple.

At June 30, 2012, other real estate owned, carried at fair value, which is measured for impairment using the fair value of the property less estimated selling costs, had a net carrying amount of $24.8 million, with a valuation allowance of $6.0 million. This resulted in additional expenses of $633,000 during the three months ended June 30, 2012, and additional expenses of $1.8 million during the six months ended June 30, 2012. At December 31, 2011, 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 resulting in a write-down of $4.8 million for the year ended December 31, 2011.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis at June 30, 2012:

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Average)
Impaired loans:
Permanent real estate loans	$	30,429	Sales comparison approach	Adjustment for differences between comparable sales	12.07%-45.44% (28.75%)
			Income approach	Adjustment for differences in net operating income Capitalization rate	7.52%-10.73% (9.49%)
Construction loans		10,900	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-25.00% (9.83%)
			Income approach	Adjustment for differences in net operating income Capitalization rate	10.00%
Consumer loans		17	Sales comparison approach	Adjustment for differences between comparable sales	20.00%
Commercial loans		400	Sales comparison approach	Adjustment for differences between comparable sales	1.6%-24.18% (11.15%)
			Income approach	Adjustment for differences in net operating income Capitalization rate	8.5%-10% (9.25%)
Foreclosed assets:
Permanent real estate loans		4,753	Sales comparison approach	Adjustment for differences between comparable sales	3.60%-16.47% (10.20%)
Construction loans		5,877	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-47.24% (17.63%)

In accordance with generally accepted accounting principles, the carrying value and estimated fair values of financial instruments, at June 30, 2012 and December 31, 2011, were as follows:

				Fair Value Measurements at June 30, 2012 Using:
	June 30, 2012			Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
	Carrying Value			(Level 1)			(Level 2)			(Level 3)
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	98,522		$	98,522		$	—		$	—
Available for sale securities		431,040			276			430,764			—
Loans held for sale		8,435			—			8,709			—
Loans, net		1,249,595			—			—			1,271,569
FHLB stock		26,464			n/a			n/a			n/a
Accrued interest receivable		5,959			—			451			5,508
Interest rate caps		831			—			—			831
Liabilities:
Deposits:
Checking, savings and money market accounts		(893,067	)		(893,067	)		—			—
Certificates of deposit		(648,632	)		—			(659,939	)		—
FHLB advances		(50,704	)		—			(58,234	)		—
Repurchase agreements and other		(90,608	)		—			(102,384	)		—
Advance payments by borrowers for taxes and insurance		(14,680	)		—			(14,680	)		—
Accrued interest payable		(603	)		(580	)		(23	)		—

	December 31, 2011
	Carrying			Fair
	Value			Value
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	54,136		$	54,136
Available for sale securities		459,598			459,598
Loans held for sale		12,727			13,098
Loans, net		1,379,276			1,402,452
Federal Home Loan Bank stock		26,464			n/a
Accrued interest receivable		6,741			6,741
Interest Rate Caps		1,933			1,933
Liabilities:
Deposits:
Checking, savings and money market accounts		(817,082	)		(817,082	)
Certificates of deposit		(771,415	)		(782,146	)
Federal Home Loan Bank advances		(128,155	)		(136,727	)
Repurchase agreements and other		(90,618	)		(103,719	)
Advance payments by borrowers for taxes and insurance		(23,282	)		(23,282	)
Accrued interest payable		(610	)		(610	)

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

(a) Cash and Cash Equivalents

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

(b) FHLB Stock

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

(c) Loans

Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

(d) Deposits

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(e) Short-term Borrowings

The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

(f) Other Borrowings

The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

(g) Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate fair value resulting in a Level 2 classification.

(h) Off-balance Sheet Instruments

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.