Fair Value Accounting and Measurement

9 Months Ended

Sep. 30, 2012

Fair Value Disclosures [Abstract]

Fair Value Accounting and Measurement

Fair Value Accounting and Measurement

The Fair Value Measurements and Disclosures topic of the FASB ASC defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value. We hold fixed and variable rate interest-bearing securities, investments in marketable equity securities and certain other financial instruments, which are carried at fair value. Fair value is determined based upon quoted prices when available or through the use of alternative approaches, such as matrix or model pricing, when market quotes are not readily accessible or available.

The valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our own market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets that are accessible at the measurement date.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.

Fair values are determined as follows:

Securities at fair value are priced using a combination of market activity, industry recognized information sources, yield curves, discounted cash flow models and other factors. These fair value calculations are considered a Level 2 input method under the provisions of the Fair Value Measurements and Disclosures topic of the FASB ASC.

Interest rate contract positions are valued in models, which use as their basis, readily observable market parameters and are classified within Level 2 of the valuation hierarchy.

The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis at September 30, 2012 and December 31, 2011 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:

	Fair value		Fair Value Measurements at Reporting Date Using
			Level 1		Level 2		Level 3
September 30, 2012	(in thousands)
Assets
Securities available for sale
U.S. government agency and government-sponsored enterprise mortgage-back securities and collateralized mortgage obligations	$	563,208	$	—	$	563,208	$	—
State and municipal debt securities	282,500		—		279,550		2,950
U.S. government agency and government-sponsored enterprise securities	94,506		—		94,506		—
Other securities	3,410		—		3,410		—
Total securities available for sale	$	943,624	$	—	$	940,674	$	2,950
Other assets (Interest rate contracts)	$	16,375	$	—	$	16,375	$	—
Liabilities
Other liabilities (Interest rate contracts)	$	16,375	$	—	$	16,375	$	—

	Fair value		Fair Value Measurements at Reporting Date Using
			Level 1		Level 2		Level 3
December 31, 2011	(in thousands)
Assets
Securities available for sale
U.S. government agency and government-sponsored enterprise mortgage-back securities and collateralized mortgage obligations	$	695,954	$	—	$	695,954	$	—
State and municipal debt securities	285,763		—		285,763		—
U.S. government agency and government-sponsored enterprise securities	43,063		—		43,063		—
Other securities	3,330		—		3,330		—
Total securities available for sale	$	1,028,110	$	—	$	1,028,110	$	—
Other assets (Interest rate contracts)	$	16,302	$	—	$	16,302	$	—
Liabilities
Other liabilities (Interest rate contracts)	$	16,302	$	—	$	16,302	$	—

There were no transfers between Level 1 and Level 2 of the valuation hierarchy during the nine month period ended September 30, 2012.

At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. Activity in Level 3 assets measured at fair value on a recurring basis for the three and nine months ended September 30, 2012 is summarized in the following table:

	Three months ended September 30, 2012		Nine months ended September 30, 2012
Securities available for sale - State and municipal securities:	(in thousands)
Beginning balance	$	—	$	—
Unrealized gain recorded to accumulated other comprehensive income (1)	2,950		2,950
Ending Balance	$	2,950	$	2,950

_____________

(1) Based on information available at September 30, 2012, the the fair value of a security that had been fully impaired was increased to the original par amount as the Company was notified that there would be a full repayment. See Note 3 "Securities" for more information.

Nonrecurring Measurements

Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment and OREO. The following methods were used to estimate the fair value of each such class of financial instrument:

Impaired loans—A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, a loan’s observable market price, or the fair market value of the collateral if the loan is a collateral-dependent loan. Generally, the Company utilizes the fair market value of the collateral to measure impairment. The impairment evaluations are performed in conjunction with the ALLL process on a quarterly basis by officers in the Special Credits group, which reports to the Chief Credit Officer. The Real Estate Appraisal Services Department ("REASD"), which also reports to the Chief Credit Officer, is responsible for obtaining appraisals from third-parties or performing internal evaluations. If an appraisal is obtained from a third-party, the REASD reviews the appraisal to evaluate the adequacy of the appraisal report, including its scope, methods, accuracy, and reasonableness.

Other real estate owned and Other personal property owned—OREO and OPPO are real and personal property that the Bank has taken ownership of in partial or full satisfaction of a loan or loans. OREO and OPPO are generally measured based on the item's fair market value as indicated by an appraisal or a letter of intent to purchase. OREO and OPPO are recorded at the lower of carrying amount or fair value less estimated costs to sell. This amount becomes the property’s new basis. Any write-downs based on the property fair value less estimated cost to sell at the date of acquisition are charged to the allowance for loan and lease losses. Management periodically reviews OREO and OPPO in an effort to ensure the property is carried at the lower of its new basis or fair value, net of estimated costs to sell. Any write-downs subsequent to acquisition are charged to earnings. The initial and subsequent write-down evaluations are performed by officers in the Special Credits group, which reports to the Chief Credit Officer. The REASD obtains appraisals from third-parties for OREO and OPPO and performs internal evaluations. If an appraisal is obtained from a third-party, the REASD reviews the appraisal to evaluate the adequacy of the appraisal report, including its scope, methods, accuracy, and reasonableness.

The following tables set forth the Company's assets that were measured using fair value estimates on a nonrecurring basis at September 30, 2012 and 2011.

	Fair value at September 30, 2012		Fair Value Measurements at Reporting Date Using						Gains (Losses) During the Three Months Ended September 30, 2012			Losses During the Nine Months Ended September 30, 2012
			Level 1		Level 2		Level 3
	(in thousands)
Impaired loans	$	6,094	$	—	$	—	$	6,094	$	509		$	(3,377	)
Noncovered OREO	1,807		—		—		1,807		(458		)	(3,117		)
Covered OREO	1,021		—		—		1,021		(481		)	(1,025		)
Noncovered OPPO	—		—		—		—		—			(1,990		)
	$	8,922	$	—	$	—	$	8,922	$	(430	)	$	(9,509	)

	Fair value  at September 30, 2011		Fair Value Measurements at Reporting Date Using						Losses During the Three Months Ended September 30, 2011			Losses During the Nine Months Ended September 30, 2011
			Level 1		Level 2		Level 3
	(in thousands)
Impaired loans	$	3,717	$	—	$	—	$	3,717	$	(735	)	$	(4,707	)
Noncovered OREO	2,876		—		—		2,876		(573		)	(3,120		)
Covered OREO	455		—		—		455		(204		)	(280		)
Noncovered OPPO	—		—		—		—		—			(185		)
	$	7,048	$	—	$	—	$	7,048	$	(1,512	)	$	(8,292	)

The losses on impaired loans disclosed above represent the amount of the specific reserve and/or charge-offs during the period applicable to loans held at period end. The amount of the specific reserve is included in the allowance for loan and lease losses. The losses on OREO and OPPO disclosed above represent the write-downs taken at foreclosure that were charged to the allowance for loan and lease losses, as well as subsequent write-downs from updated appraisals that were charged to earnings.

Quantitative information about Level 3 fair value measurements

The range and weighted-average of the significant unobservable inputs used to fair value our Level 3 nonrecurring assets, along with the valuation techniques used, are shown in the following table:

	Fair value at September 30, 2012		Valuation Technique	Unobservable Input	Range (Weighted Average) (1)
	(dollars in thousands)
Impaired loans - real estate collateral	$	4,148	Market	Adjustment to Appraisal Value	N/A (2)
Impaired loans - other collateral (3)	1,946		Market	Adjustment to stated value	0% - 70% (33%)
Noncovered OREO	1,807		Market	Adjustment to Appraisal Value	N/A (2)
Covered OREO	1,021		Market	Adjustment to Appraisal Value	N/A (2)
Noncovered OPPO	—		Market	Adjustment to Appraisal Value	N/A (2)
(1) Discount applied to appraisal value, letter of intent to purchase, or stated value (in the case of accounts receivable and inventory).
(2) Quantitative disclosures are not provided for impaired loans collateralized by real estate, noncovered OREO, covered OREO and noncovered OPPO because there were no adjustments made to the appraisal value during the current period.
(3) Other collateral consists of accounts receivable and inventory.

Fair value of financial instruments

Because broadly traded markets do not exist for most of the Company’s financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. These determinations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and due from banks and interest-earning deposits with banks—The fair value of financial instruments that are short-term or reprice frequently and that have little or no risk are considered to have a fair value that approximates carrying value (Level 1).

Securities available for sale—Securities at fair value are priced using a combination of market activity, industry recognized information sources, yield curves, discounted cash flow models and other factors (Level 2).

Federal Home Loan Bank stock—The fair value is based upon the par value of the stock which equates to its carrying value (Level 2).

Loans—Loans are not recorded at fair value on a recurring basis. Nonrecurring fair value adjustments are periodically recorded on impaired loans that are measured for impairment based on the fair value of collateral. For most performing loans, fair value is estimated using expected duration and lending rates that would have been offered on September 30, 2012 for loans which mirror the attributes of the loans with similar rate structures and average maturities. The fair values resulting from these calculations are reduced by an amount representing the change in estimated fair value attributable to changes in borrowers’ credit quality since the loans were originated. For nonperforming loans, fair value is estimated by applying a valuation discount based upon loan sales data from the FDIC. For covered loans, fair value is estimated by discounting the expected future cash flows using a lending rate that would have been offered on September 30, 2012 (Level 3).

FDIC loss-sharing asset —The fair value of the FDIC loss-sharing asset is estimated based on discounting the expected future cash flows using an estimated market rate (Level 3).

Interest rate contracts—Interest rate swap positions are valued in models, which use as their basis, readily observable market parameters (Level 2).

Deposits—For deposits with no contractual maturity, the fair value is equal to the carrying value (Level 1). The fair value of fixed maturity deposits is based on discounted cash flows using the difference between the deposit rate and current market rates for deposits of similar remaining maturities (Level 2).

FHLB advances—The fair value of Federal Home Loan Bank of Seattle (the “FHLB”) advances is estimated based on discounting the future cash flows using the market rate currently offered (Level 2).

Repurchase Agreements—The fair value of securities sold under agreement to repurchase is estimated based on discounting the future cash flows using the market rate currently offered (Level 2).

Other Financial Instruments—The majority of our commitments to extend credit and standby letters of credit carry current market interest rates if converted to loans, as such, carrying value is assumed to equal fair value.

The following table summarizes carrying amounts and estimated fair values of selected financial instruments as well as assumptions used by the Company in estimating fair value:

	September 30, 2012										December 31, 2011
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3		Carrying Amount		Fair Value
	(in thousands)
Assets
Cash and due from banks	$	98,979	$	98,979	$	98,979	$	—	$	—	$	91,364	$	91,364
Interest-earning deposits with banks	463,613		463,613		463,613		—		—		202,925		202,925
Securities available for sale	943,624		943,624		—		940,674		2,950		1,028,110		1,028,110
FHLB stock	22,017		22,017		—		22,017		—		22,215		22,215
Loans held for sale	3,600		3,600		—		3,600		—		2,148		2,148
Loans	2,854,603		2,944,623		—		—		2,944,623		2,827,259		2,957,345
FDIC loss-sharing asset	111,677		35,518		—		—		35,518		175,071		71,788
Interest rate contracts	16,375		16,375		—		16,375		—		16,302		16,302
Liabilities
Deposits	$	3,938,855	$	3,939,661	$	3,421,361	$	518,300	$	—	$	3,815,529	$	3,817,013
FHLB Advances	113,080		113,206		—		113,206		—		119,009		119,849
Repurchase agreements	25,000		26,220		—		26,220		—		25,000		26,580
Interest rate contracts	16,375		16,375		—		16,375		—		16,302		16,302