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Disclosures about fair value of assets and liabilities | 9 Months Ended
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Sep. 30, 2012
Fair Value of Financial Instruments [Abstract] |
Disclosures about fair value of assets and liabilities | Note 8 – Disclosures about fair value of assets and liabilities The Fair Value Measurements topic of the FASB ASC defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. There are three levels of inputs that may be used to measure fair value:
Level 1 |  | Quoted prices in active markets for identical assets or liabilities
Level 2 |  | 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 for substantially the full term of the assets or liabilities
Level 3 |  | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended September 30, 2012. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below. Available for sale securities When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Treasury and federal agency securities, state and municipal securities, federal agency mortgage obligations and mortgage-backed pools, private-label mortgage-backed pools and corporate notes. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. Observable inputs include dealer quotes, market spreads, cash flow analysis, the U.S. Treasury yield curve, trade execution data, market consensus prepayment spreads and available credit information and the bond’s terms and conditions. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed-income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping, and matrix pricing. In addition, model processes, such as an option adjusted spread model is used to develop prepayment and interest rate scenarios for securities with prepayment features. Hedged loans Certain fixed rate loans have been converted to variable rate loans by entering into interest rate swap agreements. The fair value of those fixed rate loans is based on discounting the estimated cash flows using interest rates determined by the respective interest rate swap agreement. Loans are classified within Level 2 of the valuation hierarchy based on the unobservable inputs used. Interest rate swap agreements The fair value of the Company’s interest rate swap agreements is estimated by a third party using inputs that are primarily unobservable including a yield curve, adjusted for liquidity and credit risk, contracted terms and discounted cash flow analysis, therefore, are classified within Level 2 of the valuation hierarchy. The following table presents the fair value measurements of assets and liabilities recognized in the accompanying financial statements measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at the following:
|  | Fair Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
September 30, 2012 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and federal agencies |  | $ | 47,376 |  |  | $ | — |  |  | $ | 47,376 |  |  | $ | — |
State and municipal |  |  | 174,821 |  |  |  | — |  |  |  | 174,821 |  |  |  | — |
Federal agency collateralized mortgage obligations |  |  | 99,041 |  |  |  | — |  |  |  | 99,041 |  |  |  | — |
Federal agency mortgage-backed pools |  |  | 174,137 |  |  |  | — |  |  |  | 174,137 |  |  |  | — |
Private labeled mortgage-backed pools |  |  | 2,288 |  |  |  | — |  |  |  | 2,288 |  |  |  | — |
Corporate notes |  |  | 41 |  |  |  | — |  |  |  | 41 |  |  |  | — |
Total available-for-sale securities |  |  | 497,704 |  |  |  | — |  |  |  | 497,704 |  |  |  | — |
Hedged loans |  |  | 74,947 |  |  |  | — |  |  |  | 74,947 |  |  |  | — |
Forward sale commitments |  |  | 942 |  |  |  | — |  |  |  | 942 |  |  |  | — |
Interest rate swap agreements |  |  | (7,969 | ) |  |  | — |  |  |  | (7,969 | ) |  |  | — |
Commitments to originate loans |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
December 31, 2011 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and federal agencies |  | $ | 13,022 |  |  | $ | — |  |  | $ | 13,022 |  |  | $ | — |
State and municipal |  |  | 143,890 |  |  |  | — |  |  |  | 143,890 |  |  |  | — |
Federal agency collateralized mortgage obligations |  |  | 91,122 |  |  |  | — |  |  |  | 91,122 |  |  |  | — |
Federal agency mortgage-backed pools |  |  | 179,351 |  |  |  | — |  |  |  | 179,351 |  |  |  | — |
Private labeled mortgage-backed pools |  |  | 3,636 |  |  |  | — |  |  |  | 3,636 |  |  |  | — |
Corporate notes |  |  | 24 |  |  |  | — |  |  |  | 24 |  |  |  | — |
Total available-for-sale securities |  |  | 431,045 |  |  |  | — |  |  |  | 431,045 |  |  |  | — |
Hedged loans |  |  | 54,362 |  |  |  | — |  |  |  | — |  |  |  | 54,362 |
Forward sale commitments |  |  | 662 |  |  |  | — |  |  |  | — |  |  |  | 662 |
Interest rate swap agreements |  |  | (7,102 | ) |  |  | — |  |  |  | — |  |  |  | (7,102 | )
Commitments to originate loans |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Transfers between levels Transfers between Levels 1, 2 and 3 and the reasons for those transfers are as follows:
|  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  | Reason for Transfer |
Transfers to level: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Hedged loans |  | $ | — |  |  | $ | 74,947 |  |  | $ | — |  |  |  | (a | )
Forward sale commitments |  |  | — |  |  |  | 942 |  |  |  | — |  |  |  | (b | )
Interest rate swap agreements |  |  | — |  |  |  | (7,969 | ) |  |  | — |  |  |  | (a | )
Commitments to originate loans |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (b | )
Total transfers to level |  | $ | — |  |  | $ | 67,920 |  |  | $ | — |  |  |  |  |
The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying condensed consolidated balance sheet using significant unobservable (Level 3) inputs (Unaudited):
|  | Hedged Loans |  |  | Forward Sale Commitments |  |  | Interest Rate Swaps |  |  | Commitments to Originate Loans |
Beginning balance December 31, 2011 |  | $ | 54,362 |  |  | $ | 662 |  |  | $ | (7,101 | ) |  | $ | — |
Total realized and unrealized gains and losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in net income |  |  | (74 | ) |  |  | (152 | ) |  |  | 74 |  |  |  | (71 | )
Included in other comprehensive income, gross |  |  | — |  |  |  | — |  |  |  | 563 |  |  |  | — |
Purchases, issuances, and settlements |  |  | 6,114 |  |  |  | — |  |  |  | — |  |  |  | — |
Principal payments |  |  | (491 | ) |  |  | — |  |  |  | — |  |  |  | — |
Transfers out to Level 2 |  |  | (59,911 | ) |  |  | (510 | ) |  |  | 6,464 |  |  |  | 71 |
Ending balance September 30, 2012 |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
|  | Hedged Loans |  |  | Forward Sale Commitments |  |  | Interest Rate Swaps |  |  | Commitments to Originate Loans |
Beginning balance December 31, 2010 |  | $ | 50,088 |  |  | $ | 407 |  |  | $ | (3,415 | ) |  | $ | — |
Total realized and unrealized gains and losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in net income |  |  | (410 | ) |  |  | (126 | ) |  |  | 410 |  |  |  | (56 | )
Included in other comprehensive income, gross |  |  | — |  |  |  | — |  |  |  | 451 |  |  |  | — |
Purchases, issuances, and settlements |  |  | (352 | ) |  |  | — |  |  |  | — |  |  |  | — |
Principal payments |  |  | (915 | ) |  |  | — |  |  |  | — |  |  |  | — |
Ending balance March 31, 2011 |  |  | 48,411 |  |  |  | 281 |  |  |  | (2,554 | ) |  |  | (56 | )
Total realized and unrealized gains and losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in net income |  |  | 351 |  |  |  | 174 |  |  |  | (351 | ) |  |  | (8 | )
Included in other comprehensive income, gross |  |  | — |  |  |  | — |  |  |  | (941 | ) |  |  | — |
Purchases, issuances, and settlements |  |  | 1,200 |  |  |  | — |  |  |  | — |  |  |  | — |
Principal payments |  |  | (344 | ) |  |  | — |  |  |  | — |  |  |  | — |
Ending balance June 30, 2011 |  |  | 49,618 |  |  |  | 455 |  |  |  | (3,846 | ) |  |  | (64 | )
Total realized and unrealized gains and losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in net income |  |  | 393 |  |  |  | 294 |  |  |  | (393 | ) |  |  | 64 |
Included in other comprehensive income, gross |  |  | — |  |  |  | — |  |  |  | (3,001 | ) |  |  | — |
Purchases, issuances, and settlements |  |  | 1,797 |  |  |  | — |  |  |  | — |  |  |  | — |
Principal payments |  |  | (628 | ) |  |  | — |  |  |  | — |  |  |  | — |
Ending balance September 30, 2011 |  | $ | 51,180 |  |  | $ | 749 |  |  | $ | (7,240 | ) |  | $ | — |
Realized gains and losses included in net income for the periods are reported in the condensed consolidated statements of income as follows:
|  | Three Months Ended September 30 |  |  | Nine Months Ended September 30 |
|  | 2012 |  |  | 2011 |  |  | 2012 |  |  | 2011 |
Non Interest Income |  | (Unaudited) |  |  | (Unaudited) |  |  | (Unaudited) |  |  | (Unaudited) |
Total gains and losses from: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Hedged loans |  | $ | 112 |  |  | $ | 394 |  |  | $ | 336 |  |  | $ | 335 |
Fair value interest rate swap agreements |  |  | (112 | ) |  |  | (394 | ) |  |  | (336 | ) |  |  | (335 | )
Derivative loan commitments |  |  | 320 |  |  |  | 359 |  |  |  | 600 |  |  |  | 1,157 |
|  | $ | 320 |  |  | $ | 359 |  |  | $ | 600 |  |  | $ | 1,157 |
Certain other assets are measured at fair value on a nonrecurring basis in the ordinary course of business and are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment):
|  | Fair Value |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
September 30, 2012 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | 10,462 |  |  | $ | — |  |  | $ | — |  |  | $ | 10,462 |
Mortgage servicing rights |  |  | 4,602 |  |  |  | — |  |  |  | — |  |  |  | 4,602 |
December 31, 2011 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | 5,822 |  |  | $ | — |  |  | $ | — |  |  | $ | 5,822 |
Mortgage servicing rights |  |  | 4,193 |  |  |  | — |  |  |  | — |  |  |  | 4,193 |
Impaired (collateral dependent): Fair value adjustments for impaired and non-accrual loans typically occur when there is evidence of impairment. Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be timely collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. The Company measures fair value based on the value of the collateral securing the loans. Collateral may be in the form of real estate or personal property, including equipment and inventory. The value of the collateral is determined based on internal estimates as well as third-party appraisals or non-binding broker quotes. These measurements were classified as Level 3. The fair value of the Company’s other real estate owned is determined using Level 3 inputs, which include current and prior appraisals net of estimated costs to sell. Fair value adjustments on impaired loans were $2.5 million at September 30, 2012 and $2.1 million at December 31, 2011. Mortgage Servicing Rights (MSRs): MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. The Company determines the fair value of MSRs using an income approach model based upon the Company’s month-end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs and changes in valuation inputs and assumptions. The Company reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. The following table presents qualitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements, other than goodwill, at September 30, 2012.
|  | Fair Value at September 30, 2012 |  |  | Valuation Technique |  | Unobservable Inputs |  | Range (Weighted Average)
Impaired loans |  |  | 10,462 |  |  | Collateral based measurement |  | Discount to reflect current market conditions and ultimate collectability |  | 0% - 50%
Mortgage servicing rights |  |  | 4,602 |  |  | Discounted cashflows |  | Discount to reflect current market conditions |  | 0% - 20%

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