Fair Value

3 Months Ended

Mar. 31, 2013

Fair Value [Abstract]

Fair Value

9. Fair Value

Fair value is defined by GAAP as the amount that an asset could be bought or sold, or a liability incurred or settled, between willing parties, other than during a liquidation. GAAP established a fair value hierarchy that prioritizes the use of inputs in valuation methodologies into the following three levels:

Level I: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets, as of the reported date. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. A contractually binding sales price also provides reliable evidence of fair value.

Level II: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets: inputs to the valuation methodology include quoted prices for identical or similar assets or liabililties in markets that are not active; or inputs to the valuation methodology that utilize the model-based techniques for which all significant assumptions are observable in the market.

Level III: Inputs to the valuation methodology are unobservable and significant to the fair value measurement; inputs to the valuation methodology that utilize a model-based techniques for which significant assumptions are not observable in the market; or inputs to the valuation methodology that requires significant management judgment or estimation, some of which may be internally developed.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Investment Securities Available-for-Sale

Management classifies the Companies equity securities as Level 1 measurements since quoted market prices were available, unadjusted, for identical securities in active markets. Declines in the fair value of individual equity securities that are deemed to be other than temporary, will be written down to current market value and included in earnings as realized losses. Level 2 investment securities were primarily comprised of debt securities issued by states and municipalities and corporations as well as mortgage-backed securities issued by government agencies. On a monthly basis, the fair values for securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Due to recent uncertainties in the credit markets broadly, and the lack of both trading and new issuance of floating rate trust preferred securities, market price indications generally reflect the lack of liquidity in these markets, therefore the Company classifies these securities as Level III. Due to this lack of practical quoted prices, fair value for floating rate trust preferred securities has been determined using a discounted cash-flow technique. Cash flows are estimated based upon the contractual terms of each instrument. Market rates have been calculated based upon the five year historical discount margin for these instruments from August 2002 through August 2007, when the market was more liquid. These market rates were then adjusted for credit spreads and liquidity risk given the current markets. Credit spreads are based upon the Moody’s rating for each bond and range from 45 to 80 basis points. Liquidity risk adjustments ranged from 20 to 55 basis points where the securities of the 15 largest banks in the United States are assigned 20 to 40 basis points and banks outside of the top 15 were given a higher liquidity risk adjustment. Approximately $17.9 million or 49.2% of the $36.4 million in floating rate trust preferred securities represent investments in three of the four largest banks in the United States.

Derivative Financial Instruments

Derivative financial instruments recorded at fair value on a recurring basis are comprised of interest rate caps and interest rate swap agreements. The Company classifies these instruments as Level II. The Company determines the fair value of the interest rate caps quarterly by using quoted prices from two brokers. The maximum market indication used is the highest price obtained from the brokers, unless this price is Level III as indicated by the broker. If so this price is excluded and the highest Level II is used. The Company utilizes a third-party pricing service to measure its interest rate swap contracts. This service provides pricing information by utilizing evaluated pricing models, supported with market data information. Cash flows are projected for each payment date using the index forward curve. These swap cash flows are then discounted to time zero using LIBOR zero-coupon interest rates, the accepted cost of funds for a financial institution. The implicit assumption is that the risk associated with the cash flows on the derivative is the same as the risk associated with a loan in the interbank market. The present value of the fixed portion is then added to the present value of the floating portion. The sum of both is the fair market value of the interest rate swap.

The following tables present the assets and liabilities reported on the consolidated statements of financial condition at their fair value on a recurring basis as of March 31, 2013 and December 31, 2012 by level within the fair value hierarchy. As required by GAAP, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	As of March 31, 2013
(Dollar amounts in thousands)	Quoted Prices in Active Markets for Identical Assets or Liabilities (Level I)		Significant Other Observable  Inputs (Level II)		Significant Unobservable Inputs (Level III)		Total
Assets:
Securities available for sale
Trust preferred securities	$	—	$	1,888	$	36,353	$	38,241
Municipal securities		—		189,259		—		189,259
Equity securities		1,991		—		—		1,991
Corporate bonds		—		227,073		—		227,073
Mortgage backed securities
U.S. sponsored entities		—		627,756		—		627,756
Private label		—		2,309		—		2,309
Subtotal mortgage-backed securities		—		630,065		—		630,065
Total securities available for sale	$	1,991	$	1,048,285	$	36,353	$	1,086,629
Other Assets
Interest rate caps	$	—	$	157	$	—	$	157
Total other assets	$	—	$	157	$	—	$	157
Liabilities
Other Liabilities
Interest rate swaps	$	—	$	5,387	$	—	$	5,387
Total other liabilities	$	—	$	5,387	$	—	$	5,387

	As of December 31, 2012
(Dollar amounts in thousands)	Quoted Prices in Active Markets for Identical Assets or Liabilities (Level I)		Significant Other Observable  Inputs (Level II)		Significant Unobservable Inputs (Level III)		Total
Assets:
Securities available for sale
Trust preferred securities	$	—	$	1,848	$	36,179	$	38,027
Municipal securities		—		190,887		—		190,887
Equity securities		1,818		—		—		1,818
Corporate bonds		—		225,795		—		225,795
Mortgage backed securities
U.S. sponsored entities		—		649,933		—		649,933
Private label		—		4,316		—		4,316
Subtotal mortgage-backed securities		—		654,249		—		654,249
Total securities available for sale	$	1,818	$	1,072,779	$	36,179	$	1,110,776
Other Assets
Interest rate caps	$	—	$	90	$	—	$	90
Total other assets	$	—	$	90	$	—	$	90
Liabilities:
Other Liabilties
Interest rate swaps	$	—	$	5,743	$	—	$	5,743
Total other liabilities	$	—	$	5,743	$	—	$	5,743

There were no transfers between Level I and Level II assets measured at fair value. The following table presents the changes in the Level III assets measured at fair value on a recurring basis for the periods ended March 31, 2013 and 2012.

Fair value measurements using significant unobservable inputs (Level III)

	Trust Preferred Securities
	March 31,
	2013		2012
Beginning balance January 1,	$	36,179	$	35,789
Total net realized/unrealized gains (losses)
Included in earnings:
Interest income on securities		3		3
Net realized loss on securities available for sale		—		—
Included in other comprehensive income		171		416
Transfers in and/or out of Level III		—		—
Purchases, issuances and settlements
Purchases		—		—
Issuances		—		—
Sales		—		—
Settlements		—		—
Ending balance, March 31,	$	36,353	$	36,208

The following table summarizes changes in unrealized gains and losses recorded in earnings for the three month period ended March 31, 2013 and 2012 for Level III assets and liabilities that are still held at March 31, 2013 and 2012.

	Securities available for sale
	March 31,
	2013		2012
Interest income on securities	$	3	$	3
Net realized loss on securities available for sale		—		—
Total	$	3	$	3

For Level III assets measured at fair value on a recurring or non-recurring basis as of March 31, 2013, the significant observable inputs used in the fair value measurements were as follows:

(Dollar amounts in thousands)	Fair Value at March 31, 2013		Fair Value at December  31, 2012		Valuation Technique	Significant Unobservable Inputs	Range
Trust Preferred Securities	$	36,353	$	36,179	Discounted Cash Flow	Credit Spreads	45-80 basis points
						Liquidity Risk Adjustments	20-55 basis points
						Default Rates	.6% -1%
Impaired Loans		14,578		14,740	Discounted Cash Flow	Remaining term	.5 yrs to 21.5 yrs
						Discount Rate	3.8%-7.0%
					Appraisal of collateral	Interest Rate	3.3%-8.5%
Real estate acquired through foreclosure		2,426		2,441	Appraisal of collateral (1)	N/A	N/A
Servicing assets		12		14	Discounted Cash Flow	Remaining term	.2 yrs to 18.8 yrs
						Discount Rate	11.25%-12.25%

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally includes various level III inputs which are not identifiable. Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

The significant unobservable inputs in the fair value measurement of the Company’s trust preferred securities are the credit spreads, liquidity risk adjustments and default rates as described above under Investment Securities Available for Sale. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company may be required periodically to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower-of-cost-or-fair value accounting or impairment write-downs of individual assets. During the period ended March 31, 2013 and 2012, the Company incurred write-downs on its REO properties of $0 and $150,000, respectively, there were no adjustments to the fair value for the Company’s remaining assets and liabilities measured at fair value on a nonrecurring basis in accordance with GAAP during the respective periods.