Note 11 - Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value, Measurement Inputs, Disclosure [Text Block]

11. Fair Value Measurements

The Company adopted ASC Topic 820 on January 1, 2008, and determined the fair values of our financial instruments based on the following:

· Level 1 - Quoted prices in active markets for identical assets or liabilities.

· Level 2 - Observable prices in active markets for similar assets or liabilities; prices for identical or similar assets or liabilities in markets that are not active; directly observable market inputs for substantially the full term of the asset and liability; market inputs that are not directly observable but are derived from or corroborated by observable market data.

· Level 3 – Unobservable inputs based on the Company’s own judgments about the assumptions that a market participant would use.

The Company uses the following methodologies to measure the fair value of its financial assets and liabilities on a recurring basis:

Securities Available for Sale. For certain actively traded agency preferred stocks, mutual funds, and U.S. Treasury securities, the Company measures the fair value based on quoted market prices in active exchange markets at the reporting date, a Level 1 measurement.  The Company also measures securities by using quoted market prices for similar securities or dealer quotes, a Level 2 measurement.  This category generally includes U.S. Government agency securities, state and municipal securities, mortgage-backed securities (“MBS”), commercial MBS, collateralized mortgage obligations, asset-backed securities, corporate bonds and trust preferred securities.

Trading Securities. The Company measures the fair value of trading securities based on quoted market prices in active exchange markets at the reporting date, a Level 1 measurement. The Company also measures the fair value for other trading securities based on quoted market prices for similar securities or dealer quotes, a Level 2 measurement.

Warrants. The Company measures the fair value of warrants based on unobservable inputs based on assumption and management judgment, a Level 3 measurement.

Currency Option and Foreign Exchange Contracts. The Company measures the fair value of currency option and foreign exchange contracts based on dealer quotes on a recurring basis, a Level 2 measurement.

Interest Rate Swaps. Fair value of interest rate swaps is derived from observable market prices for similar assets on a recurring basis, a Level 2 measurement.

The valuation techniques for the assets and liabilities valued on a nonrecurring basis are as follows:

Impaired Loans. The Company does not record loans at fair value on a recurring basis.  However, from time to time, nonrecurring fair value adjustments to collateral dependent impaired loans are recorded based on either the current appraised value of the collateral, a Level 2 measurement, or management’s judgment and estimation of value reported on old appraisals which are then adjusted based on recent market trends, a Level 3 measurement.

Loans Held for Sale.  The Company records loans held for sale at fair value based on quoted prices from third party sale analyses, existing sale agreements or appraisal reports adjusted by sales commission assumptions, a Level 3 measurement.

Goodwill.  The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350.  The two-step impairment testing process, if needed, begins by assigning net assets and goodwill to our three reporting units— Commercial Lending, Retail Banking, and East Coast Operations.  The Company then completes “step one” of the impairment test by comparing the fair value of each reporting unit (as determined based on the discussion below) with the recorded book value (or “carrying amount”) of its net assets, with goodwill included in the computation of the carrying amount.  If the fair value of a reporting unit exceeds its carrying amount, goodwill of that reporting unit is not considered impaired, and “step two” of the impairment test is not necessary.  If the carrying amount of a reporting unit exceeds its fair value, step two of the impairment test is performed to determine the amount of impairment.  Step two of the impairment test compares the carrying amount of the reporting unit’s goodwill to the “implied fair value” of that goodwill.  The implied fair value of goodwill is computed by assuming that all assets and liabilities of the reporting unit would be adjusted to the current fair value, with the offset as an adjustment to goodwill.  This adjusted goodwill balance is the implied fair value used in step two.  An impairment charge is recognized for the amount by which the carrying amount of goodwill exceeds its implied fair value. In connection with the determination of fair value, certain data and information is utilized, including earnings forecasts at the reporting unit level for the next four years.  Other key assumptions include terminal values based on future growth rates and discount rates for valuing the cash flows, which have inputs for the risk-free rate, market risk premium and adjustments to reflect inherent risk and required market returns.  Because of the significance of unobservable inputs in the valuation of goodwill impairment, goodwill subject to nonrecurring fair value adjustments is classified as a Level 3 measurement.

Core Deposit Intangibles. Core deposit intangibles is initially recorded at fair value based on a valuation of the core deposits acquired and is amortized over its estimated useful life to its residual value in proportion to the economic benefits consumed.  The Company assesses the recoverability of this intangible asset on a nonrecurring basis using the core deposits remaining at the assessment date and the fair value of cash flows expected to be generated from the core deposits, a Level 3 measurement.

Other Real Estate Owned. Real estate acquired in the settlement of loans is initially recorded at fair value based on the appraised value of the property on the date of transfer, less estimated costs to sell, a Level 2 measurement.  From time to time, nonrecurring fair value adjustments are made to other real estate owned based on the current updated appraised value of the property, also a Level 2 measurement, or management’s judgment and estimation of value reported on old appraisals which are then adjusted based on recent market trends, a Level 3 measurement.

Investments in Venture Capital.  The Company periodically reviews its investments in venture capital for other-than-temporary impairment on a nonrecurring basis.  Investments in venture capital were written down to their fair value based on available financial reports from venture capital partnerships and management’s judgment and estimation, a Level 3 measurement.

Equity Investments. The Company records equity investments at fair value on a nonrecurring basis based on quoted market prices in active exchange markets at the reporting date, a Level 1 measurement.

The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis at September 30, 2012, and at December 31, 2011:

As of September 30, 2012	Fair Value Measurements Using						Total at
	Level 1		Level 2		Level 3		Fair Value
Assets	(In thousands)
Securities available-for-sale
U.S. Treasury securities	$	309,920	$	-	$	-	$	309,920
U.S. government sponsored entities		-		50,103		-		50,103
Mortgage-backed securities		-		566,751		-		566,751
Collateralized mortgage obligations		-		11,781		-		11,781
Asset-backed securities		-		146		-		146
Corporate debt securities		-		337,549		-		337,549
Mutual funds		6,149		-		-		6,149
Preferred stock of government sponsored entities		-		887		-		887
Trust preferred securities		-		10,285		-		10,285
Total securities available-for-sale		316,069		977,502		-		1,293,571
Trading securities		-		4,619		-		4,619
Warrants		-		-		114		114
Option contracts		-		56		-		56
Foreign exchange contracts		-		2,401		-		2,401
Total assets	$	316,069	$	984,578	$	114	$	1,300,761
Liabilities
Option contracts	$	-	$	49	$	-	$	49
Foreign exchange contracts		-		1,018		-		1,018
Total liabilities	$	-	$	1,067	$	-	$	1,067

As of December 31, 2011	Fair Value Measurements Using						Total at
	Level 1		Level 2		Level 3		Fair Value
Assets	(In thousands)
Securities available-for-sale
U.S. government sponsored entities	$	-	$	501,226	$	-	$	501,226
State and municipal securities		-		1,928		-		1,928
Mortgage-backed securities		-		337,631		-		337,631
Collateralized mortgage obligations		-		16,486		-		16,486
Asset-backed securities		-		166		-		166
Corporate debt securities		-		380,429		-		380,429
Mutual funds		6,035		-		-		6,035
Preferred stock of government sponsored entities		-		1,654		-		1,654
Trust preferred securities		-		45,963		-		45,963
Other equity securities		2,960		-		-		2,960
Total securities available-for-sale		8,995		1,285,483		-		1,294,478
Trading securities		2		4,540		-		4,542
Warrants		-		-		218		218
Option contracts		-		34		-		34
Foreign exchange contracts		-		2,151		-		2,151
Total assets	$	8,997	$	1,292,208	$	218	$	1,301,423
Liabilities
Interest rate swaps	$	-	$	2,634	$	-	$	2,634
Option contracts		-		5		-		5
Foreign exchange contracts		-		486		-		486
Total liabilities	$	-	$	3,125	$	-	$	3,125

The Company measured the fair value of its warrants on a recurring basis using significant unobservable inputs.  The fair value of warrants was $114,000 at September 30, 2012, compared to $218,000 at December 31, 2011.  The fair value adjustment of warrants was included in other operating income in the first nine months of 2012.

For financial assets measured at fair value on a nonrecurring basis that were still reflected in the balance sheet at September 30, 2012, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related individual assets  at September 30, 2012, and at December 31, 2011, and the total losses for the periods indicated:

	As of September 30, 2012								Total Losses
	Fair value measurements using						Total at		For the three months ended				For the nine months ended
	Level 1		Level 2		Level 3		fair value		September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
Assets	(In thousands)
Impaired loans by type:
Commercial loans	$	-	$	-	$	7,699	$	7,699	$	1,983	$	-	$	2,848	$	1,868
Construction loans- residential		-		-		500		500		-		-		-		-
Real estate loans		-		-		10,087		10,087		-		-		301		532
Land loans		-		-		1,154		1,154		-		-		-		-
Residential mortgage loans		-		-		12,109		12,109		251		73		782		73
Total impaired loans		-		-		31,549		31,549		2,234		73		3,931		2,473
Other real estate owned (1)		-		36,833		7,487		44,320		2,875		4,125		10,602		6,505
Investments in venture capital		-		-		9,118		9,118		39		50		226		337
Equity investments		280		-		-		280		-		199		43		199
Total assets	$	280	$	36,833	$	48,154	$	85,267	$	5,148	$	4,447	$	14,802	$	9,514

(1) Other real estate owned balance of $60.6 million in the condensed consolidated balance sheets is net of estimated disposal costs.

	As of December 31, 2011								Total Losses
	Fair value measurements using						Total at		For the twelve months ended
	Level 1		Level 2		Level 3		Fair Value		December 31, 2011		December 31, 2010
Assets	(In thousands)
Impaired loans by type:
Commercial loans	$	-	$	-	$	4,251	$	4,251	$	877	$	3,411
Construction loans- residential		-		-		-		-		-		1,295
Real estate loans		-		-		35,576		35,576		820		1,407
Land loans		-		-		611		611		46		1,003
Total impaired loans		-		-		40,438		40,438		1,743		7,116
Loans held-for-sale		-		-		760		760		-		3,160
Other real estate owned (1		-		79,029		1,093		80,122		7,003		20,139
Investments in venture capital		-		-		8,693		8,693		379		760
Equity investments		323		-		-		323		200		304
Total assets	$	323	$	79,029	$	50,984	$	130,336	$	9,325	$	31,479

(1) Other real estate owned balance of $92.7 million in the condensed consolidated balance sheets is net of estimated disposal costs.

The significant unobservable (Level 3) inputs used in the fair value measurement of collateral for collateral-dependent impaired loans was primarily based on the appraised value of collateral adjusted by estimated sales cost and commissions.  The Company generally obtains new appraisal reports every six months.  As the Company’s primary objective in the event of default would be to monetize the collateral to settle the outstanding balance of the loan, less marketable collateral would receive a larger discount. During the reported periods, collateral discounts ranged from 45% in the case of accounts receivable collateral to 65% in the case of inventory collateral.

The significant unobservable inputs used in the fair value measurement of loans held for sale was primarily based on the quoted price or sale price adjusted by estimated sales cost and commissions.  The significant unobservable inputs used in the fair value measurement of other real estate owned (“OREO”) was primarily based on the appraised value of OREO adjusted by estimated sales cost and commissions.

The Company applies estimated sales cost and commission ranging from 3% to 6% to collateral value of impaired loans, quoted price or loan sale price of loans held for sale, and appraised value of OREOs.

The significant unobservable inputs in the Black-Scholes option pricing model for the fair value of warrants are the expected life of warrant ranging from 1 to 5 years, risk-free interest rate from 0.24% to 0.61%, and stock volatility of the Company from 14.81% to 22.6%.