Fair Values of Financial Instruments

12 Months Ended

Dec. 31, 2012

Fair Values of Financial Instruments [Abstract]

Fair Values of Financial Instruments

Note 16. Fair Values of Financial Instruments:

For impaired loans measured at fair value on a nonrecurring basis during 2012 and 2011 the following table provides the carrying value of the related individual assets at year end. We used Level 3 inputs to determine the estimated fair value of our impaired loans.

	Carrying Value at				Provision for
	December 31,				Loan Losses (2)
	2012		2011		2012		2011
	(In thousands)
Impaired loans (1)	$	11,637	$	7,694	$	1,163	$	438

(1) Carrying value represents our impaired loans net of loan loss reserves. Our carrying value is determined based on management’s assessment of the fair value of the collateral based on numerous factors including operating statistics to the extent available, appraised value of the collateral, tax assessed value and market environment.

(2) Represents the net change in the provision for loan losses included in our consolidated statements of income (loss) related specifically to our impaired loans during the periods presented.

For REO, our carrying value approximates the estimated fair value at the time of foreclosure and the lower of cost or market thereafter. We used Level 3 inputs to determine the estimated fair value of our REO. The carrying value of our REO is established at the time of foreclosure based upon management’s assessment of its fair value based on numerous factors including operating statistics to the extent available, the appraised value of the collateral, tax assessed value and market environment.

The following is activity for our REO:

	Years Ended
	December 31,
	2012		2011
	(In thousands)
Value - beginning of year	$	1,259	$	3,477
Foreclosures		1,481		409
Additions		-		17
Cost of sales		(1,660)		(1,757)
Impairment losses		(341)		(887)
Value - end of year	$	739	$	1,259

The estimated fair value of our financial instruments was as follows:

	December 31,
	2012				2011
			Estimated				Estimated
	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Level
	(In thousands)
Assets:
Loans Receivable Subject To Credit Risk	$	200,642	$	181,112	$	203,951	$	190,255	3
SBA 7(a) loans receivable, subject to secured borrowings		38,349		43,096		30,476		34,140	3
Liabilities:
Structured notes and SBIC debentures payable		17,190		18,027		18,445		19,027	3
Secured borrowings - government guaranteed loans		41,008		41,008		32,546		32,546	3
Revolving credit facility		11,900		11,900		17,800		17,800	3
Junior Subordinated Notes		27,070		22,592		27,070		22,595	3

We used Level 3 inputs to determine the estimated fair value of our financial instruments. In general, estimates of fair value may differ from the carrying amounts of the financial assets and liabilities primarily as a result of the effects of discounting future cash flows. Considerable judgment is required to interpret market data and develop estimates of fair value. Accordingly, the estimates presented may not be indicative of the amounts we could realize in a current market exchange.

Loans Receivable Subject To Credit Risk: Our loans receivable are recorded at cost and adjusted by net loan origination fees and discounts. In order to determine the estimated fair value of our loans receivable, we use a present value technique for the anticipated future cash flows using certain assumptions including a discount rate based on current market interest rates, prepayment tendencies and potential loan losses. Significant increases (decreases) in any of these inputs in isolation would result in a significantly lower (higher) fair value measurement. Reserves are established based on numerous factors including, but not limited to, the creditor’s payment history, collateral value, guarantor support, expected future cash flows and other factors. In the absence of a readily ascertainable market value, the estimated value of our loans receivable may differ from the values that would be placed on the portfolio if a ready market for the loans receivable existed.

SBA 7(a) loans receivable, subject to secured borrowings: Represents the government guaranteed portion of loans which were sold with the proceeds received from the sale reflected as secured borrowings – government guaranteed loans (a liability on our consolidated balance sheet – see below). There is no credit risk associated with these loans since the SBA has guaranteed payment of the principal. In order to determine the estimated fair value of our loans receivable, we use a present value technique for the anticipated future cash flows using certain assumptions including a discount rate based on current market interest rates and prepayment tendencies.

Structured notes and SBIC debentures payable and Junior Subordinated Notes: The estimated fair value is based on a present value calculation based on prices of the same or similar instruments after considering market risks, current interest rates and remaining maturities. The structured notes were repaid on February 15, 2012.

Secured borrowings – government guaranteed loans: The estimated fair value approximates cost as the interest rate on these secured borrowings approximates current market interest rates. Includes the unamortized deferred cash premiums collected on the sale of the government guaranteed portions of the loans.

Revolving credit facility: The carrying amount is a reasonable estimation of fair value as the interest rate on this instrument is variable and was set in a third-party transaction.