Fair Value Measurement

9 Months Ended

Sep. 30, 2013

Fair Value Measurement [Abstract]

Fair Value Measurement

6.  Fair Value Measurement

There were no assets or liabilities measured at fair value on a recurring basis in the Company’s financial statements as of September 30, 2013 or December 31, 2012.

The following table presents major categories of assets measured at fair value on a non-recurring basis as of September 30, 2013 (in thousands):

			Fair Value Measurements Using
			Quoted prices in
			Active Markets	Significant	Significant	Total
			for Identical	Other Observable	Unobservable	Impairments (1)
		September 30,	Assets	Inputs	Inputs	For the Nine
Description		2013	(Level 1)	(Level 2)	(Level 3)	Months Ended
Loans measured for
impairment using the fair value
of the underlying collateral	$	24,154	-	-	24,154	4,565
Impaired real estate owned		48,803	-	-	48,803	2,287
Impaired loans held for sale		12,922	-	-	12,922	925
Total	$	85,879	-	-	85,879	7,777

(1) Total impairments represent the amount of losses recognized during the nine months ended September 30, 2013 on assets that were held and measured at fair value on a non-recurring basis as of September 30, 2013.

Quantitative information about significant unobservable inputs within Level 3 on major categories of assets measured on a non-recurring basis is as follows (dollars in thousands):

As of September 30, 2013		Fair	Valuation	Unobservable
Description		Value	Technique	Inputs	Range (Average) (1)
Loans measured for
impairment using the fair value
of the underlying collateral	$	24,154	Fair Value of Collateral	Appraisal	$0.1 - 9.0 million (0.4 million)
Impaired real estate owned		48,803	Fair Value of Property	Appraisal	$0.1 - 12.0 million (1.9 million)
Impaired loans held for sale		12,922	Fair Value of Collateral	Appraisal	$0.1 - 2.2 million (0.4 million)
Total	$	85,879

(1)  Average was computed by dividing the aggregate appraisal amounts by the number of appraisals.

The following table presents major categories of assets measured at fair value on a non-recurring basis as of September 30, 2012 (in thousands):

			Fair Value Measurements Using
			Quoted prices in
			Active Markets	Significant	Significant	Total
			for Identical	Other Observable	Unobservable	Impairments (1)
		September 30,	Assets	Inputs	Inputs	For the Three
Description		2012	(Level 1)	(Level 2)	(Level 3)	Months Ended
Impaired loans using the fair value
of the underlying collateral	$	60,492	-	-	60,492	4,869
Impaired real estate owned		36,494	-	-	36,494	4,302
Impaired loans held for sale		16,559	-	-	16,559	1,097
Total	$	113,545	-	-	113,545	10,268

(1)  Total impairments represent the amount of losses recognized during the nine months ended September 30, 2012 on assets that were held and measured at fair value on a non-recurring basis as of September 30, 2012.

Quantitative information about significant unobservable inputs within Level 3 on major categories of assets measured on a non-recurring basis is as follows (dollars in thousands):

As of September 30, 2012		Fair	Valuation	Unobservable
Description		Value	Technique	Inputs	Range (Average) (1)
Impaired  loans using the
fair value of the underlying collateral	$	60,492	Fair Value of Property	Appraisal	$0.3 - 4.6 million (3.4 million)
Impaired real estate owned		36,494	Fair Value of Property	Appraisal	$0.1 - 7.8 million (2.6 million)
Impaired loans held for sale		16,559	Fair Value of Collateral	Appraisal	$0.3 - 4.3 million (2.4 million)
Total	$	113,545

(1)  Average was computed by dividing the aggregate appraisal amounts by the number of appraisals.

Loans Measured For Impairment

Impaired loans are generally valued based on the fair value of the underlying collateral less cost to sell. The fair value of our loans may significantly increase or decrease based on changes in property values as our loans are primarily secured by real estate.  The Company primarily uses third party appraisals to assist in measuring non-homogenous impaired loans. These appraisals generally use the market or income approach valuation technique and use market observable data to formulate an opinion of the fair value of the loan’s collateral. However, the appraiser uses professional judgment in determining the fair value of the collateral or properties, and we may also adjust these values for changes in market conditions subsequent to the appraisal date. When current appraisals are not available for certain loans, we use our judgment on market conditions to adjust the most current appraisal. The sales prices may reflect prices of sales contracts not closed, and the amount of time required to sell out the real estate project may be derived from current appraisals of similar projects. The Company generally recognizes impairment losses on homogenous loans based on third party broker price opinions or automated valuation services when impaired homogenous loans become 120 days delinquent. These third party valuations from real estate professionals also use Level 3 inputs in determining fair values. The observable market inputs used to fair value loans include comparable property sales, rent rolls, market capitalization rates on income producing properties, risk adjusted discounts rates and foreclosure timeframes and exposure periods.  As a consequence, the calculation of the fair value of the collateral is considered Level 3 inputs.

Impaired Real Estate Owned

Real estate owned is generally valued using third party appraisals or broker price opinions. These appraisals generally use the market approach valuation technique and use market observable data to formulate an opinion of the fair value of the properties.  The market observable data typically consists of comparable property sales, rent rolls, market capitalization rates on income producing properties and risk adjusted discount rates. However, the appraisers or brokers use professional judgments in determining the fair value of the properties and we may also adjust these values for changes in market conditions subsequent to the valuation date. As a consequence of using appraisals, broker price opinions and adjustments to appraisals, the fair values of the properties are considered Level 3 inputs.

Loans Held for Sale

Loans held for sale are valued using an income approach with Level 3 inputs as market quotes or sale transactions of similar loans are generally not available.  The fair value is estimated by discounting forecasted cash flows, using a discount rate that reflects the risks inherent in the loans held for sale portfolio.  For non-performing loans held for sale, the forecasted cash flows are based on the estimated fair value of the collateral less cost to sell adjusted for foreclosure expenses and other operating expenses of the underlying collateral until foreclosure or sale.

Financial Disclosures about Fair Value of Financial Instruments

				Fair Value Measurements Using
		Carrying		Quoted prices in
		Amount	Fair Value	Active Markets	Significant	Significant
		As of	As of	for Identical	Other Observable	Unobservable
(in thousands)		September 30,	September 30,	Assets	Inputs	Inputs
Description		2013	2013	(Level 1)	(Level 2)	(Level 3)
Financial assets:
Cash and interest bearing
deposits in banks	$	25,347	25,347	25,347	-	-
Loans receivable including loans held for sale, net		192,139	208,736	-	-	208,736
Financial liabilities:
Notes payable		10,441	11,585	-	-	11,585
Note Payable Woodbridge		11,750	11,414	-	-	11,414
BB&T preferred interest in FAR		110,646	111,747	-	-	111,747

				Fair Value Measurements Using
		Carrying		Quoted prices in
		Amount	Fair Value	Active Markets	Significant	Significant
		As of	As of	for Identical	Other Observable	Unobservable
(in thousands)		December 31,	December 31,	Assets	Inputs	Inputs
Description		2012	2012	(Level 1)	(Level 2)	(Level 3)
Financial assets:
Cash and interest bearing
deposits in other banks	$	62,873	62,873	62,873	-	-
Loans receivable including loans held for sale, net		317,310	316,075	-	-	316,075
Financial liabilities:
Notes payable		10,301	10,301	-	-	10,301
BB&T preferred interest in FAR		196,877	201,099	-	-	201,099

Management has made estimates of fair value that it believes to be reasonable. However, because there is no active market for many of these financial instruments, management has derived the fair value of the majority of these financial instruments using the income approach technique with Level 3 unobservable inputs. Management estimates used in its net present value financial models rely on assumptions and judgments regarding issues where the outcome is unknown and actual results or values may differ significantly from these estimates. The Company’s fair value estimates do not consider the tax effect that would be associated with the disposition of the assets or liabilities at their fair value estimates.  As such, the Company may not receive the estimated value upon sale or disposition of the asset or pay the estimated value upon disposition of the liability in advance of its scheduled maturity.

Interest-bearing deposits in other banks include $0.5 million of certificates of deposits guaranteed by the FDIC with maturities of less than one year as of December 31, 2012.  Due to the FDIC guarantee and the short-term maturity of these certificates of deposit, the fair value of these deposits approximates the carrying value.

Fair values are estimated for loan portfolios with similar financial characteristics. Loans are segregated by category, and each loan category is further segmented into performing and non-performing categories.

The fair value of performing loans is calculated by using an income approach with Level 3 inputs.  The fair value of performing loans is estimated by discounting forecasted cash flows through the estimated maturity using estimated market discount rates that reflect the interest rate risk inherent in the loan portfolio.  The fair value of non-performing collateral dependent loans is estimated using an income approach with Level 3 inputs. The fair value of non-performing loans utilizes the fair value of the collateral adjusted for operating and selling expenses and discounted over the estimated holding period.

BB&T preferred interest in FAR is considered an adjustable rate debt security.  The fair value of the security is calculated using the income approach with Level 3 inputs and was obtained by discounting forecasted cash flows by risk adjusted market interest rate spreads to the LIBOR swap curve.  The market spreads were obtained from reference data in the secondary institutional market place. 

The fair value of notes payable and note payable-Woodbridge were measured using the income approach with Level 3 inputs and was obtained by discounting the forecasted cash flows based on risk adjusted market interest rates.