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Fair Value of Financial Instruments
 12 Months Ended
Dec. 31, 2011
Fair Value Of Financial Instruments  
Fair Value of Financial Instruments

Note 14. Fair Value of Financial Instruments

 

As discussed in Note 1(o), the Company is required to disclose estimated fair values for its financial instruments. Fair value estimates as of December 31, 2011 and 2010 and limitations thereon are set forth below for the Company’s financial instruments. See Note 1(o) for a discussion of fair value methods and assumptions, as well as fair value information for off-balance sheet financial instruments.

 

    December 31, 2011   December 31, 2010
($ in thousands)   Carrying Amount   Estimated Fair Value   Carrying Amount   Estimated Fair Value
                 
Cash and due from banks, noninterest-bearing   $ 80,341       80,341       56,821       56,821  
Due from banks, interest-bearing     135,218       135,218       154,320       154,320  
Federal funds sold     608       608       861       861  
Securities available for sale     182,626       182,626       181,182       181,182  
Securities held to maturity     57,988       62,754       54,018       53,312  
Presold mortgages in process of settlement     6,090       6,090       3,962       3,962  
Loans - non-covered, net of allowance     2,033,542       1,987,979       2,044,729       2,020,109  
Loans - covered, net of allowance     355,426       355,426       359,973       359,973  
FDIC indemnification asset     121,677       121,004       123,719       122,351  
Accrued interest receivable     11,779       11,779       13,579       13,579  
                                 
Deposits     2,755,037       2,759,504       2,652,613       2,657,214  
Securities sold under agreements to repurchase     17,105       17,105       54,460       54,460  
Borrowings     133,925       106,333       196,870       168,508  
Accrued interest payable     1,872       1,872       2,082       2,082  

 

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no highly liquid market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include net premises and equipment, intangible and other assets such as foreclosed properties, deferred income taxes, prepaid expense accounts, income taxes currently payable and other various accrued expenses. In addition, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

 

Relevant accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

 

Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2: Quoted prices for similar instruments in active or non-active markets and model-derived valuations in which all significant inputs are observable in active markets.

 

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. 

   

The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, 2011.

 

($ in thousands)




Description of Financial Instruments		   Fair Value at December 31, 2011   Quoted Prices in Active Markets for Identical Assets
(Level 1)		   Significant Other Observable Inputs
(Level 2)		   Significant Unobservable Inputs
(Level 3)
Recurring                                
Securities available for sale:                                
Government-sponsored enterprise securities   $ 34,665       —       34,665       —  
Mortgage-backed securities     124,105       —       124,105       —  
Corporate bonds     12,488       —       12,488       —  
Equity securities     11,368       398       10,969       —  
Total available for sale securities   $ 182,626       398       182,227       —  
                                 
Nonrecurring                                
Impaired loans – covered   $ 55,690       —       55,690       —  
Impaired loans – non-covered     85,286       —       85,286       —  
Other real estate – covered     85,272       —       85,272       —  
Other real estate – non-covered     37,023       —       37,023       —  

  

The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, 2010.

 

($ in thousands)




Description of Financial Instruments		   Fair Value at December 31, 2010   Quoted Prices in Active Markets for Identical Assets
(Level 1)		   Significant Other Observable Inputs
(Level 2)		   Significant Unobservable Inputs
(Level 3)
Recurring                                
Securities available for sale:                                
Government-sponsored enterprise securities   $ 43,273       —       43,273       —  
Mortgage-backed securities     107,460       —       107,460       —  
Corporate bonds     15,330       —       15,330       —  
Equity securities     15,119       360       14,759       —  
Total available for sale securities   $ 181,182       360       180,822       —  
                                 
Nonrecurring                                
Impaired loans – covered   $ 72,825       —       72,825       —  
Impaired loans – non-covered     96,003       —       96,003       —  
Other real estate – covered     94,891       —       94,891       —  
Other real estate – non-covered     21,081       —       21,081       —  

 

The following is a description of the valuation methodologies used for instruments measured at fair value.

 

Securities — When quoted market prices are available in an active market, the securities are classified as Level 1 in the valuation hierarchy. Level 1 securities for the Company include certain equity securities. If quoted market prices are not available, but fair values can be estimated by observing quoted prices of securities with similar characteristics, the securities are classified as Level 2 on the valuation hierarchy.  For the Company, Level 2 securities include mortgage-backed securities, collateralized mortgage obligations, government-sponsored entity securities, and corporate bonds. In cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

 

Impaired loans — Fair values for impaired loans in the above table are collateral dependent and are estimated based on underlying collateral values, which are then adjusted for the cost related to liquidation of the collateral.

 

Other real estate – Other real estate, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses.

 

There were no transfers to or from Level 1 and 2 during the year ended December 31, 2011.

 

For the year ended December 31, 2011, the increase in the fair value of securities available for sale was $1,418,000, which is included in other comprehensive income (net of taxes of $554,000). For the year ended December 31, 2010, the increase in the fair value of securities available for sale was $646,000, which is included in other comprehensive income (net of taxes of $251,000). Fair value measurement methods at December 31, 2011 and 2010 are consistent with those used in prior reporting periods.