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Fair Value Option and Fair Value Measurements | 9 Months Ended
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Sep. 30, 2014
Fair Value Option and Fair Value Measurements |
Fair Value Option and Fair Value Measurements | Note 12 – Fair Value Option and Fair Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy established by the Company also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs that may be used to measure fair value are: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date. Level 2: Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a company’s own view about the assumptions that market participants would use in pricing an asset or liability. Transfers between levels are deemed to have occurred at the end of the reporting period. For the quarters ended September 30, 2014, and 2013 there were no significant transfers between levels. Except for auction rate asset-backed securities, the majority of securities (available-for-sale and held-to-maturity) are valued by external pricing services or dealer market participants and are classified in Level 2 of the fair value hierarchy. Both market and income valuation approaches are utilized. Quarterly, the Company evaluates the methodologies used by the external pricing services or dealer market participants to develop the fair values to determine whether the results of the valuations are representative of an exit price in the Company’s principal markets and an appropriate representation of fair value. The Company uses the following methods and significant assumptions to estimate fair value:
| · |  | Government-sponsored agency debt securities are primarily priced using available market information through processes such as benchmark curves, market valuations of like securities, sector groupings and matrix pricing.
| · |  | Other government-sponsored agency securities, MBS and some of the actively traded real estate mortgage investment conduits and collateralized mortgage obligations are priced using available market information including benchmark yields, prepayment speeds, spreads, volatility of similar securities and trade date.
| · |  | State and political subdivisions are largely grouped by characteristics (e.g.., geographical data and source of revenue in trade dissemination systems). Because some securities are not traded daily and due to other grouping limitations, active market quotes are often obtained using benchmarking for like securities.
| · |  | During 2013, asset-backed auction rate securities were acquired and priced using data from dealer market participants until December 31, 2013. A t December 31, 2013, to present and including asset-backed auction rate securities acquired in 2014, the Company utilized pricing data from a nationally recognized valuation firm providing specialized securities valuation services. Therefore, the valuations of auction rate asset-backed securities are considered Level 3 valuations.
| · |  | During the third quarter of 2014, asset-backed collateralized loan obligations were acquired and priced using data from a pricing matrix support by our bond accounting service provider and are therefore considered Level 2 valuations.
| · |  | Residential mortgage loans eligible for sale in the secondary market are carried at fair market value. The fair value of loans held-for-sale is determined using quoted secondary market prices.
| · |  | Lending related commitments to fund certain residential mortgage loans, e.g. residential mortgage loans with locked interest rates to be sold in the secondary market and forward commitments for the future delivery of mortgage loans to third party investors as well as forward commitments for future delivery of MBS are considered derivatives. Fair values are estimated based on observable changes in mortgage interest rates including prices for MBS from the date of the commitment and do not typically involve significant judgments by management.
| · |  | The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income to derive the resultant value. The Company is able to compare the valuation model inputs, such as the discount rate, prepayment speeds, weighted average delinquency and foreclosure/bankruptcy rates to widely available published industry data for reasonableness.
| · |  | Interest rate swap positions, both assets and liabilities, are based on valuation pricing models using an income approach reflecting readily observable market parameters such as interest rate yield curves.
| · |  | Both the credit valuation reserve on current interest rate swap positions and on receivables related to unwound customer interest rate swap positions were determined based upon management’s estimate of the amount of credit risk exposure, including by available collateral protection and/or by utilizing an estimate related to a probability of default as indicated in the Bank credit policy. Such adjustments would result in a Level 3 classification.
| · |  | The fair value of impaired loans with specific allocations of the allowance for loan losses is essentially based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are made in the appraisal process by the appraisers to reflect differences between the available comparable sales and income data. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
| · |  | Nonrecurring adjustments to certain commercial and residential real estate properties classified as OREO are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.
Assets and Liabilities Measured at Fair Value on a Recurring Basis: The tables below present the balance of assets and liabilities at September 30, 2014, and December 31, 2013, respectively, measured by the Company at fair value on a recurring basis:
|  | September 30, 2014
|  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for-sale |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury |  | $ | 1,532 |  | $ | - |  | $ | - |  | $ | 1,532
U.S. government agencies |  |  | - |  |  | 1,638 |  |  | - |  |  | 1,638
States and political subdivisions |  |  | - |  |  | 13,754 |  |  | 125 |  |  | 13,879
Corporate Bonds |  |  | - |  |  | 30,781 |  |  | - |  |  | 30,781
Collateralized mortgage obligations |  |  | - |  |  | 28,417 |  |  | - |  |  | 28,417
Asset-backed securities |  |  | - |  |  | 109,017 |  |  | 83,781 |  |  | 192,798
Collateralized loan obligations |  |  | - |  |  | 93,198 |  |  | - |  |  | 93,198
Loans held-for-sale |  |  | - |  |  | 3,422 |  |  | - |  |  | 3,422
Mortgage servicing rights |  |  | - |  |  | - |  |  | 5,640 |  |  | 5,640
Other assets (Interest rate swap agreements net of swap credit valuation) |  |  | - |  |  | 42 |  |  | - |  |  | 42
Other assets (Mortgage banking derivatives) |  |  | - |  |  | 266 |  |  | - |  |  | 266
Total |  | $ | 1,532 |  | $ | 280,535 |  | $ | 89,546 |  | $ | 371,613
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Other liabilities (Interest rate swap agreements) |  | $ | - |  | $ | 42 |  | $ | - |  | $ | 42
Total |  | $ | - |  | $ | 42 |  | $ | - |  | $ | 42
|  | December 31, 2013
|  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for-sale |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury |  | $ | 1,544 |  | $ | - |  | $ | - |  | $ | 1,544
U.S. government agencies |  |  | - |  |  | 1,672 |  |  | - |  |  | 1,672
States and political subdivisions |  |  | - |  |  | 16,669 |  |  | 125 |  |  | 16,794
Corporate bonds |  |  | - |  |  | 15,102 |  |  | - |  |  | 15,102
Collateralized mortgage obligations |  |  | - |  |  | 63,876 |  |  | - |  |  | 63,876
Asset-backed securities |  |  | - |  |  | 119,066 |  |  | 154,137 |  |  | 273,203
Loans held-for-sale |  |  | - |  |  | 3,822 |  |  | - |  |  | 3,822
Mortgage servicing rights |  |  | - |  |  | - |  |  | 5,807 |  |  | 5,807
Other assets (Interest rate swap agreements net of swap credit valuation) |  |  | - |  |  | 229 |  |  | (6) |  |  | 223
Other assets (Mortgage banking derivatives) |  |  | - |  |  | 315 |  |  | - |  |  | 315
Total |  | $ | 1,544 |  | $ | 220,751 |  | $ | 160,063 |  | $ | 382,358
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Other liabilities (Interest rate swap agreements) |  | $ | - |  | $ | 229 |  | $ | - |  | $ | 229
Total |  | $ | - |  | $ | 229 |  | $ | - |  | $ | 229
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are as follows:
|  | Nine months ended September 30, 2014
|  | Securities available-for- sale |  |  |  |  |  |
|  |  |  |  |  | States and |  | Mortgage |  | Interest Rate
|  |  |  |  |  | Political |  | Servicing |  | Swap
|  |  | Asset-backed |  | Subdivisons |  | Rights |  | Valuation
Beginning balance January 1, 2014 |  |  | $ | 154,137 |  | $ | 125 |  | $ | 5,807 |  | $ | (6)
Transfers into Level 3 |  |  |  | - |  |  | - |  |  | - |  |  | -
Total gains or losses |  |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings (or changes in net assets) |  |  |  | 3,178 |  |  | - |  |  | (761) |  |  | 6
Included in other comprehensive income |  |  |  | (1,748) |  |  | - |  |  | - |  |  | -
Purchases, issuances, sales, and settlements |  |  |  |  |  |  |  |  |  |  |  |  |
Purchases |  |  |  | 63,704 |  |  | - |  |  | - |  |  | -
Issuances |  |  |  | - |  |  | - |  |  | 594 |  |  | -
Sales |  |  |  | (135,490) |  |  | - |  |  | - |  |  | -
Ending balance September 30, 2014 |  |  | $ | 83,781 |  | $ | 125 |  | $ | 5,640 |  | $ | -
|  | Nine months ended September 30, 2013
|  | Securities available-for- sale |  |  |  |  |  |
|  |  |  |  |  |  | States and |  | Mortgage |  | Interest Rate
|  | Collateralized Debt |  |  |  | Political |  | Servicing |  | Swap
|  | Obligations |  | Asset-backed |  | Subdivisons |  | Rights |  | Valuation
Beginning balance January 1, 2013 |  | $ | 9,957 |  | $ | - |  | $ | 132 |  | $ | 4,116 |  | $ | (47)
Transfers into Level 3 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | -
Transfers out of Level 3 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | -
Total gains or losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings (or changes in net assets) |  |  | 178 |  |  | 485 |  |  | - |  |  | 81 |  |  | 34
Included in other comprehensive income |  |  | 1,898 |  |  | (1,487) |  |  | - |  |  | - |  |  | -
Purchases, issuances, sales, and settlements |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Purchases |  |  | - |  |  | 168,753 |  |  | - |  |  | - |  |  | -
Issuances |  |  | - |  |  | - |  |  | - |  |  | 1,259 |  |  | -
Settlements |  |  | (946) |  |  | - |  |  | - |  |  | - |  |  | -
Sales |  |  | - |  |  | (20,539) |  |  | - |  |  | - |  |  | -
Ending balance September 30, 2013 |  | $ | 11,087 |  | $ | 147,212 |  | $ | 132 |  | $ | 5,456 |  | $ | (13)
The following table and commentary presents quantitative (dollars in thousands) and qualitative information about Level 3 fair value measurements as of September 30, 2014:
|  |  |  |  |  |  |  |  |  |  | Weighted
Measured at fair value |  |  |  |  |  |  | Unobservable |  |  |  | Average
on a recurring basis: |  | Fair Value |  | Valuation Methodology |  | Inputs |  | Range of Input |  | of Inputs
Mortgage Servicing rights |  |  | 5,640 |  | Discounted Cash Flow |  | Discount Rate |  | 10.0-30.75% |  | 10.3 | %
|  |  |  |  |  |  | Prepayment Speed |  | 3.97-77.99% |  | 9.5 | %
Asset-backed securities |  |  | 83,781 |  | Discounted Cash Flow |  | Credit Risk Premium |  | 0.8-1.2% |  | 1.0 | %
|  |  |  |  | with comparable transaction yields |  | Liquidity Discount |  | 4.0-4.3% |  | 4.2 | %
The following table and commentary presents quantitative (dollars in thousands) and qualitative information about Level 3 fair value measurements as of December 31, 2013:
|  |  |  |  |  |  |  |  |  |  | Weighted
Measured at fair value |  |  |  |  |  |  | Unobservable |  |  |  | Average
on a recurring basis: |  | Fair Value |  | Valuation Methodology |  | Inputs |  | Range of Input |  | of Inputs
Mortgage Servicing rights |  |  | 5,807 |  | Discounted Cash Flow |  | Discount Rate |  | 10.2% |  | 10.2 | %
|  |  |  |  |  |  | Prepayment Speed |  | 9.7% |  | 9.7 | %
Interest Rate Swap Valuation |  |  | (6) |  | Management estimate of |  | Probability of Default |  | 5.0-20% |  | 12.5 | %
|  |  |  |  | credit risk exposure |  |  |  |  |  |  |
Asset-backed securities |  |  | 154,137 |  | Discounted Cash Flow |  | Credit Risk Premium |  | 1.1-1.5% |  | 1.2 | %
|  |  |  |  | with comparable transaction yields |  | Liquidity Discount |  | 4.5-5.1% |  | 4.9 | %
The $125,000 on the state and political subdivisions line at September 30, 2014 and December 31, 2013, under Level 3 represents a security from a small, local municipality. Given the small dollar amount and size of the municipality involved, this is categorized as Level 3 based on the payment stream received by the Company from the municipality. That payment stream is otherwise an unobservable input. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis: The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP. These assets consist of impaired loans and OREO. For assets measured at fair value on a nonrecurring basis at September 30, 2014, and December 31, 2013, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:
|  | September 30, 2014
|  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Impaired loans 1 |  | $ | - |  | $ | - |  | $ | 957 |  | $ | 957
Other real estate owned, net 2 |  |  | - |  |  | - |  |  | 40,877 |  |  | 40,877
Total |  | $ | - |  | $ | - |  | $ | 41,834 |  | $ | 41,834
1 Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans, had a carrying amount of $1.5 million, with a valuation allowance of $541,000, resulting in a decrease of specific allocations within the allowance for loan losses of $1.9 million for the nine months ended months ending September 30, 2014. 2 OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $40.9 million, which is made up of the outstanding balance of $61.7 million, net of a valuation allowance of $19.0 million and participations of $1.8 million, at September 30, 2014.
|  | December 31, 2013
|  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Impaired loans 1 |  | $ | - |  | $ | - |  | $ | 9,103 |  | $ | 9,103
Other real estate owned, net 2 |  |  | - |  |  | - |  |  | 41,537 |  |  | 41,537
Total |  | $ | - |  | $ | - |  | $ | 50,640 |  | $ | 50,640
1 Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans, had a carrying amount of $11.5 million, with a valuation allowance of $2.4 million, resulting in a decrease of specific allocations within the provision for loan losses of $3.9 million for the year ending December 31, 2013. 2 OREO is measured at the lower of carrying or fair value less costs to sell, and had a net carrying amount of $41.5 million, which is made up of the outstanding balance of $65.9 million, net of a valuation allowance of $22.3 million and participations of $2.1 million, at December 31, 2013. The Company also has assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis. These assets include OREO and impaired loans. The Company has estimated the fair values of these assets based primarily on Level 3 inputs. OREO and impaired loans are generally valued using the fair value of collateral provided by third party appraisals. These valuations include assumptions related to cash flow projections, discount rates, and recent comparable sales. The numerical range of unobservable inputs for these valuation assumptions are not meaningful.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13537-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13433-108611 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=35750535&loc=d3e13504-108611 + Details
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