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Fair Value
 9 Months Ended
Sep. 30, 2012
FairValueAbstract  
Fair Value

Note 14 – Fair Value

 

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: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

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 September 30, 2012.

 

($ in thousands)        
Description of Financial Instruments  Fair Value at
September 30,
2012		   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  $20,614    —    20,614    — 
Mortgage-backed securities   128,533    —    128,533    — 
Corporate bonds   3,857    —    3,857    — 
Equity securities   8,403    454    7,949    — 
Total available for sale securities  $161,407    454    160,953    — 
                     
Nonrecurring                    
Impaired loans – covered  $55,564    —    —    55,564 
Impaired loans – non-covered   107,935    —    —    107,935 
Foreclosed real estate – covered   58,367    —    58,367    — 
Foreclosed real estate – non-covered   38,065    —    38,065    — 

 

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    — 
Foreclosed real estate – covered   85,272    —    85,272    — 
Foreclosed real estate – non-covered   37,023    —    37,023    — 

 

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. Most of the fair values for the Company’s Level 2 securities are determined by 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. 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, as determined by third-party appraisers, which are then adjusted for the cost related to liquidation of the collateral.

 

Foreclosed real estate – Foreclosed 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.

 

Transfers of assets or liabilities between levels within the fair value hierarchy are recognized when an event or change in circumstances occurs. There were no transfers between Level 1 and Level 2 for assets or liabilities measured on a recurring basis during the three months ended September 30, 2012 or 2011.

 

For the nine months ended September 30, 2012 and 2011, the increase in the fair value of securities available for sale was $898,000 and $1,572,000, respectively, which is included in other comprehensive income (tax expense of $350,000 and $613,000, respectively). Fair value measurement methods at September 30, 2012 and 2011 are consistent with those used in prior reporting periods.

 

The carrying amounts and estimated fair values of financial instruments at September 30, 2012 and December 31, 2011 are as follows:

  

      September 30, 2012   December 31, 2011 
($ in thousands)  Level in Fair
Value
Hierarchy		  Carrying
Amount		   Estimated
Fair Value		   Carrying
Amount		   Estimated
Fair Value		 
                    
Cash and due from banks, noninterest-bearing  Level 1  $79,991    79,991    80,341    80,341 
Due from banks, interest-bearing  Level 1   202,693    202,693    135,218    135,218 
Federal funds sold  Level 1   519    519    608    608 
Securities available for sale  Level 2   161,407    161,407    182,626    182,626 
Securities held to maturity  Level 2   56,123    61,877    57,988    62,754 
Presold mortgages in process of settlement  Level 1   4,380    4,380    6,090    6,090 
Loans – non-covered, net of allowance  Level 3   2,091,920    2,048,424    2,033,542    1,987,979 
Loans – covered, net of allowance  Level 3   299,603    299,603    355,426    355,426 
FDIC indemnification asset  Level 3   107,615    107,388    121,677    121,004 
Accrued interest receivable  Level 1   10,720    10,720    11,779    11,779 
                        
Deposits  Level 2   2,834,464    2,838,106    2,755,037    2,759,504 
Securities sold under agreements to repurchase  Level 2   —    —    17,105    17,105 
Borrowings  Level 2   111,394    86,662    133,925    106,333 
Accrued interest payable  Level 2   1,421    1,421    1,872    1,872 

 

Fair value methods and assumptions are set forth below for the Company’s financial instruments.

 

Cash and Due from Banks, Federal Funds Sold, Presold Mortgages in Process of Settlement, Accrued Interest Receivable, and Accrued Interest Payable - The carrying amounts approximate their fair value because of the short maturity of these financial instruments. (Level 1)

 

Available for Sale and Held to Maturity Securities - Fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or matrix pricing. (Level 2)

 

Loans – For non-impaired loans, fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, financial and agricultural, real estate construction, real estate mortgages and installment loans to individuals. Each loan category is further segmented into fixed and variable interest rate terms. The fair value for each category is determined by discounting scheduled future cash flows using current interest rates offered on loans with similar risk characteristics. (Level 3)

 

As discussed above, fair values for impaired loans are estimated based on estimated proceeds expected upon liquidation of the collateral. (Level 3)

 

FDIC Indemnification Asset – Fair value is equal to the FDIC reimbursement rate of the expected losses to be incurred and reimbursed by the FDIC and then discounted over the estimated period of receipt. (Level 3)

 

Deposits and Securities Sold Under Agreements to Repurchase - The fair value of securities sold under agreements to repurchase and deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, checking, and money market accounts, is equal to the amount payable on demand as of the valuation date. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. (Level 2)

 

Borrowings - The fair value of borrowings is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered by the Company’s lenders for debt of similar remaining maturities. (Level 2)

 

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.