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Fair Value
9 Months Ended
Sep. 30, 2011
Fair Value 
Fair Value

4.  Fair Value

 

FASB ASC No. 820-10 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 standard 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 I 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 fair value of securities available for sale is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or 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 (Level 2 inputs).

 

For those securities that cannot be priced using quoted market prices or observable inputs a Level 3 valuation is determined. These securities are primarily trust preferred securities, which are priced using Level 3 due to current market illiquidity and certain investments in bank equities. The fair value of the trust preferred securities is computed based upon discounted cash flows estimated using interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation to the note classes.  Current estimates of expected cash flows is based on the most recent trustee reports and any other relevant market information, including announcements of interest payment deferrals or defaults of underlying issuers.  The payment, default and recovery assumptions are believed to reflect the assumptions of market participants. Cash flows are discounted at appropriate market rates, including consideration of credit spreads and illiquidity discounts.  The fair value of investments in bank equities is based on the prices of recent stock trades and is considered Level 3 because these stocks are not publicly traded.

 

The fair value of derivatives is based on valuation models using observable market data as of the measurement date (Level 2 inputs).

 

 

 

September 30, 2011

 

 

 

Fair Value Measurements

 

(Dollar amounts in thousands) 

 

Level 1

 

Level 2

 

Level 3

 

Carrying Value

 

U.S. Government agencies

 

$

—

 

$

4,029

 

$

—

 

$

4,029

 

Mortgage Backed Securities-residential

 

—

 

313,751

 

—

 

313,751

 

Mortgage Backed Securities-commercial

 

—

 

$

121

 

—

 

121

 

Collateralized mortgage obligations

 

—

 

111,203

 

—

 

111,203

 

State and municipal

 

—

 

162,651

 

8,682

 

171,333

 

Collateralized debt obligations

 

—

 

—

 

8,266

 

8,266

 

Equities

 

331

 

—

 

1,844

 

2,175

 

TOTAL

 

$

331

 

$

591,755

 

$

18,792

 

$

610,878

 

Derivitive Assets

 

 

 

2,572

 

 

 

 

 

Derivitive Liabilities

 

 

 

(2,572

)

 

 

 

 

 

 

 

December 31, 2010

 

 

 

Fair Value Measurements

 

(Dollar amounts in thousands) 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

U.S. Government agencies

 

$

—

 

$

2,073

 

$

—

 

$

2,073

 

Mortgage Backed Securities-residential

 

—

 

302,423

 

—

 

302,423

 

Mortgage Backed Securities-commercial

 

—

 

139

 

—

 

139

 

Collateralized mortgage obligations

 

—

 

94,457

 

—

 

94,457

 

State and municipal

 

—

 

157,540

 

—

 

157,540

 

Collateralized debt obligations

 

—

 

—

 

2,190

 

2,190

 

Equities

 

506

 

—

 

1,518

 

2,024

 

TOTAL

 

$

506

 

$

556,632

 

$

3,708

 

$

560,846

 

Derivitive Assets

 

 

 

1,311

 

 

 

 

 

Derivitive Liabilities

 

 

 

(1,311

)

 

 

 

 

 

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2011 and 2010.

 

 

 

Fair Value Measurements Using Significant

 

 

 

Unobservable Inputs (Level 3)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(Dollar amounts in thousands) 

 

2011

 

2010

 

2011

 

2010

 

Beginning Balance

 

$

17,219

 

$

5,463

 

$

3,708

 

$

4,777

 

Total realized/unrealized gains or losses

 

 

 

 

 

 

 

 

 

Included in earnings

 

(13

)

(859

)

(110

)

(4,028

)

Included in other comprehensive income

 

 

 

924

 

 

 

4,981

 

Settlements

 

(617

)

0

 

6,461

 

(202

)

Purchases

 

2,000

 

 

 

2,000

 

 

 

Transfers into Level 3

 

203

 

—

 

6,733

 

—

 

Ending Balance

 

$

18,792

 

$

5,528

 

$

18,792

 

$

5,528

 

 

There were no unrealized gains and losses recorded in earnings for the three and nine months ended September 30, 2011 for Level 3 assets and liabilities that are still held at September 30, 2011. Losses reported in earnings for the three and nine months ended September 30, 2010 are from assets still held at September 30, 2010.

 

The fair value for certain local municipal securities with a fair value of $6.5 million as of June 30, 2011 was transferred out of Level 2 and into Level 3 because of a lack of observable market data for these investments due to a decrease in the market activity for this security.  During the three months ended September 30, 2011, there was an additional $203 thousand of local municipal securities transferred out of level 2 into level 3 because of a lack of observable market data for these investments due to a decrease in the market activity for this security.

 

All impaired loans disclosed in footnote 2 are valued at Level 3 and are carried at a fair value of $29.8 million, net of a valuation allowance of $7.3 million at September 30, 2011. At December 31, 2010 impaired loans valued at Level 3 were carried at a fair value of $31.6 million, net of a valuation allowance of $5.9 million. The impact to the provision for loan losses was $376 and $(95) thousand for the three and nine months ended September 30, 2011, and was $866 thousand and $1.4 million for the three and nine months ended September 30, 2010. Fair value is measured based on the value of the collateral securing those loans, and is determined using several methods. Generally the fair value of real estate is determined based on appraisals by qualified licensed appraisers.

 

The carrying amounts and estimated fair value of financial instruments at September 30, 2011 and December 31, 2010, are shown below.  Carrying amount is the estimated fair value for cash and due from banks, federal funds sold, short-term borrowings, accrued interest receivable and payable, demand deposits, short-term debt and variable-rate loans or deposits that reprice frequently and fully. Security fair values were described previously. For fixed-rate loans or deposits, variable rate loans or deposits with infrequent repricing or repricing limits, and for longer-term borrowings, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values of loans held for sale are based on market bids on the loans or similar loans. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.  Fair value of debt is based on current rates for similar financing. The fair value of off-balance sheet items is not considered material. The carrying amount and estimated fair value of financial instruments are presented in the table below and were determined based on the above assumptions:

 

 

 

September 30, 2010

 

December 31, 2010

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

(Dollar amounts in thousands)

 

Value

 

Value

 

Value

 

Value

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

57,246

 

$

57,246

 

$

58,511

 

$

58,511

 

Federal funds sold

 

0

 

0

 

5,104

 

5,104

 

Securities available—for—sale

 

610,878

 

610,878

 

560,846

 

560,846

 

Federal Home Loan Bank Stock

 

20,310

 

N/A

 

23,654

 

n/a

 

Loans, net

 

1,635,544

 

1,660,378

 

1,617,810

 

1,607,895

 

FDIC Indemnification Asset

 

3,808

 

3,808

 

3,977

 

3,977

 

Accrued interest receivable

 

11,322

 

11,322

 

11,208

 

11,208

 

Deposits

 

(1,926,960

)

(1,932,680

)

(1,903,043

)

(1,909,874

)

Short—term borrowings

 

(40,637

)

(40,637

)

(34,106

)

(34,106

)

Federal Home Loan Bank advances

 

(124,210

)

(128,046

)

(125,793

)

(128,881

)

Accrued interest payable

 

(1,576

)

(1,576

)

(2,041

)

(2,041

)

 

The following tables presents loans identified as impaired by class of loans as of September 30, 2011 and December 31, 2010.

 

 

 

September 30, 2011

 

(Dollar amounts in thousands)

 

Unpaid
Principal
Balance

 

Allowance
for Loan
Losses
Allocated

 

Fair Value

 

Commercial

 

 

 

 

 

 

 

Commercial & Industrial

 

$

18,283

 

$

2,153

 

$

16,130

 

Farmland

 

$

891

 

$

—

 

$

891

 

Non Farm, Non Residential

 

11,679

 

3,257

 

8,422

 

All Other Commercial

 

1,614

 

82

 

1,532

 

Residential

 

 

 

 

 

 

 

First Liens

 

3,123

 

1,097

 

2,026

 

Junior Liens

 

879

 

363

 

516

 

Multifamily

 

638

 

325

 

313

 

TOTAL

 

$

37,107

 

$

7,277

 

$

29,830

 

 

 

 

December 31, 2010

 

(Dollar amounts in thousands)

 

Unpaid
Principal
Balance

 

Allowance
for Loan
Losses
Allocated

 

Fair Value

 

Commercial

 

 

 

 

 

 

 

Commercial & Industrial

 

$

19,868

 

$

1,508

 

$

18,360

 

Non Farm, Non Residential

 

12,397

 

3,255

 

9,142

 

All Other Commercial

 

1,577

 

128

 

1,449

 

Residential

 

 

 

 

 

 

 

First Liens

 

1,910

 

533

 

1,377

 

Junior Liens

 

1,129

 

443

 

686

 

Multifamily

 

638

 

—

 

638

 

TOTAL

 

$

37,519

 

$

5,867

 

$

31,652