Fair Value

9 Months Ended

Sep. 30, 2011

Fair Value

Fair Value

(15)  Fair Value

Fair Value Measurements

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. The accounting guidance on fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

· Level 1 — Valuations are based upon quoted prices (unadjusted) in active exchange markets involving identical assets and liabilities that the Company has the ability to access at the measurement date.

· Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar instruments in active markets; quoted prices and valuations for identical or similar instruments in markets that are not active; and model-based valuation techniques with significant assumptions and inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

· Level 3 — Valuations are derived from model-based techniques that use inputs and significant assumptions that are supported by little or no observable market data. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of pricing models, discounted cash flow models and similar techniques.

The level of fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is most-significant to the fair value measurement in its entirety.

Assets Measured at Fair Value on a Recurring Basis

The table below presents the Company’s balances of assets measured at fair value on a recurring basis at September 30, 2011 and December 31, 2010. The Company did not have any liabilities that were measured at fair value on a recurring basis at September 30, 2011 and December 31, 2010. There were no transfers of assets recorded at fair value on a recurring basis into or out of Level 1 and Level 2 fair value measurements during the nine-month period ended September 30, 2011 or the year ended December 31, 2010.

	At September 30, 2011
(Dollars in thousands)	Level 1		Level 2	Level 3	Total
Investment securities available for sale:
Marketable equity security	$	1,012	—	—	$	1,012
Asset-backed securities	—		—	5,968	5,968
	$	1,012	—	5,968	$	6,980

	At December 31, 2010
(Dollars in thousands)	Level 1		Level 2	Level 3	Total
Investment securities available for sale:
Marketable equity security	$	1,106	—	—	$	1,106
Asset-backed security	—		—	2,605	2,605
	$	1,106	—	2,605	$	3,711

The Company measures fair value for its marketable equity investment using quoted market prices in an active exchange market for identical assets (Level 1 measurement). The Company measures fair value for its asset-backed securities using discounted cash flow models based on assumptions and inputs that are corroborated by little or no observable market data (Level 3 measurement). The Company uses this measurement technique for these assets because pricing information and market-participant assumptions for its asset-backed securities are not readily accessible or frequently released to the public. At September 30, 2011 and December 31, 2010, the carrying value of the Company’s marketable equity security (at fair value) approximated $1.0 million and $1.1 million, respectively. At September 30, 2011 and December 31, 2010, the carrying value of the Company’s asset-backed securities (at fair value) approximated $6.0 million and $2.6 million, respectively.

The table below summarizes the changes to the Company’s Level 3 assets measured at fair value on a recurring basis for the three-and nine-month periods ended September 30, 2011 and 2010:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2011			2010			2011			2010
Balance, beginning of period	$	5,858		$	692		$	2,605		$	1,836
Total realized and unrealized gains for the period included in:
Net income	(63		)	—			301			3,250
Other comprehensive income	86			—			378			(1,115		)
Purchases	358			1,275			3,843			1,998
Sales	—			—			—			(3,250		)
Issuances	—			—			—			—
Settlements	(307		)	(64		)	(1,400		)	(797		)
Foreign currency translation adjustments	36			18			241			(1		)
Net transfers into Level 3	—			—			—			—
Balance, end of period	$	5,968		$	1,921		$	5,968		$	1,921

There were no transfers of assets or liabilities recorded at fair value on a recurring basis into or out of Level 3 fair value measurements during the three- or nine-month periods ended September 30, 2011 and 2010.

Assets Measured at Fair Value on a Non-Recurring Basis

The Company may be required, from time to time, to measure certain financial and non-financial assets at fair value on a non-recurring basis. These adjustments to fair value generally result from write-downs of financial and non-financial assets as a result of impairment or application of lower-of-cost or fair value accounting. The following table provides the fair value hierarchy and the carrying value of assets on the Company’s consolidated balance sheet at September 30, 2011 and December 31, 2010 that were measured at fair value on a non-recurring basis during the respective nine- and twelve-month periods then ended:

	Carrying Value at September 30, 2011
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Portfolio Assets - loans (1)	$	—	$	—	$	747	$	747
Loans receivable - SBA held for investment (1)	—		—		603		603
Real estate held for sale (2)	—		5,060		—		5,060

	Carrying Value at December 31, 2010
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Portfolio Assets - loans (1)	$	—	$	—	$	354	$	354
Loans receivable - SBA held for investment (1)	—		—		699		699
Loans receivable - other (1)	—		—		1,917		1,917
Real estate held for sale (2)	—		11,048		—		11,048
Real estate held for investment	—		6,959		—		6,959

(1)Represents the carrying value of impaired loans that were measured for impairment using the estimated fair value of the collateral for collateral-dependent loans.

(2)Represents the carrying value of foreclosed real estate properties that were impaired and measured at fair value subsequent to their initial classification as foreclosed assets.

The following table presents the decrease in value of certain assets held at the respective period end that were measured at fair value on a non-recurring basis for which a fair value adjustment was included in the Company’s results of operations during the respective period:

	Nine Months Ended
	September 30,
(Dollars in thousands)	2011			2010
Portfolio Assets - loans (1)	$	(279	)	$	(519	)
Loans receivable - SBA held for investment (1)	(361		)	(215		)
Loans receivable - other (1)	—			(1,168		)
Real estate held for sale (2)	(1,166		)	(2,079		)
Real estate held for investment (2)	—			(1,922		)
Total	$	(1,806	)	$	(5,903	)

(1)Represents write-downs of loans based on the estimated fair value of the collateral for collateral-dependent loans.

(2)Represents losses on foreclosed real estate properties that were measured at fair value subsequent to their initial classification as foreclosed assets.

The fair values of “Portfolio Assets — loans” and “Loans receivable — SBA held for investment,” as measured on a non-recurring basis, are based on collateral valuations using observable and unobservable inputs, adjusted for various considerations such as market conditions, economic and competitive environment, and other assets with similar characteristics (i.e. type, location, etc.) that, in management’s opinion, reflect elements a market participant would consider. The Company classifies its fair value measurement techniques for these assets as Level 3 inputs for the following reasons: (1) distressed asset transactions generally occur in inactive markets for which observable market prices are not readily available (i.e. price quotations vary substantially over time and among market-makers, and pricing information is generally not released to the public); and (2) the Company’s valuation techniques that are most-significant to the fair value measurements are principally derived from assumptions and inputs that are corroborated by little or no observable market data.

The fair value of “Real estate held for sale,” as measured on a non-recurring basis, is generally based on collateral valuations using observable inputs.

We attempt to base our fair values on the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs, when reasonably available and without undue cost, and minimize the use of unobservable inputs when developing fair value measurements in accordance with the fair value hierarchy. Fair value measurements for assets where there exists limited or no observable market data and, therefore, are based principally on our own estimates and assumptions, are often calculated based on collateral valuations adjusted for the economic and competitive environment, the characteristics of the asset, and other such factors. Additionally, there may be inherent weaknesses in any valuation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, that could significantly affect the results of current or future values.

Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis

In addition to the methods and assumptions we use to measure the fair value of financial instruments as discussed in the section above, we used the following methods and assumptions to estimate the fair value of our financial instruments that are not recorded at fair value in their entirety on a recurring basis in the Company’s consolidated balance sheets. The fair value estimates were based on pertinent information that was available to management as of the respective dates. The fair value estimates have not been revalued for purposes of these financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented. The amounts provided herein are estimates of the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (i.e. not a forced transaction, such as liquidation or distressed sale). Because active markets do not exist for a significant portion of the Company’s financial instruments, management used present value techniques and other valuation models to estimate the fair values of its financial instruments. These valuation methods require considerable judgment, and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used. Accordingly, the estimates provided herein do not necessarily indicate amounts which could be realized in a current exchange. The Company believes the imprecision of an estimate could be significant.

The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis on the Company’s consolidated balance sheets at September 30, 2011 and December 31, 2010 are as follows:

Cash and Cash Equivalents:  The carrying amount of cash and cash equivalents approximated fair value at September 30, 2011 and December 31, 2010.

Loans Receivable Held-for-Sale:  Loans receivable held-for-sale (primarily SBA loans held-for-sale) are carried on the Company’s consolidated balance sheet at the lower of cost or fair value. The fair value of loans held-for-sale is generally based on what secondary markets are currently offering for loans with similar characteristics. At September 30, 2011 and December 31, 2010, the carrying amount of loans held-for-sale approximated $6.8 million and $11.6 million, respectively, and the estimated fair values approximated $7.5 million and $12.8 million, respectively.

Loan Portfolio Assets and Loans Receivable:  Estimated fair values of loan Portfolio Assets and fixed-rate loans receivable are generally determined using a discounted cash flow model, adjusted by an amount for estimated losses, that employs market discount rates and other adjustments that would be expected to be made by a market participant. The estimated fair value for variable-rate loans that re-price frequently is based on carrying values adjusted for estimated credit losses and other adjustments that would be expected to be made by a market participant. The estimated fair value for impaired loans is generally based on collateral valuations using observable and unobservable inputs, adjusted for various considerations that would be expected to be made by a market participant; or discounted cash flow models that employ market discount rates and other adjustments that would be expected to be made by a market participant. Management’s estimates and assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market and specific borrower information. At September 30, 2011 and December 31, 2010, the carrying amounts of Portfolio Assets — loans and loans receivable (including accrued interest) approximated $168.0 million and $222.6 million, respectively, and the estimated fair values approximated $239.1 million and $331.1 million, respectively.

Servicing Assets:  The fair value of servicing assets is based on a combination of a discounted cash flow model of future net servicing income and analysis of current market data to estimate the fair value of our servicing assets. The key assumptions used to calculate estimated fair value of the servicing assets include prepayment speeds and discount rate. The fair value estimate excludes the value of servicing rights for loans sold with premium recourse provisions in which the servicing rights have not been capitalized. See Note 8 for the carrying amount and estimated fair values of servicing assets as of September 30, 2011 and December 31, 2010.

Notes Payable to Banks and Other:  Management believes the interest rates and terms on its debt obligations approximate the rates, market spreads and terms currently offered by other lenders for similar debt instruments of comparable terms. As such, management believes that the carrying amount of notes payable approximates fair value at September 30, 2011 and December 31, 2010.

Note Payable to Affiliates:  Estimated fair value of the Company’s notes payable to affiliates (including related interest payable) is determined at the present value of future projected cash flows using a discount rate that reflects the risks inherent in those cash flows. At September 30, 2011 and December 31, 2010, the carrying amounts of notes and interest payable to affiliates were $13.0 million and $15.8 million, respectively, and the estimated fair values approximated $6.7 million and $11.5 million, respectively.