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Fair Value
 3 Months Ended
Mar. 31, 2012
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 most 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 and state and municipal securities. 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 significant unobservable inputs used in the fair value measurement of the Corporation’s collateralized debt obligations are probabilities of specific-issuer default and deferrals and specific-issuer recovery assumptions. Significant increases in specific-issuer default assumptions or decreases in specific-issuer recovery assumptions would result in significantly lower fair value measurement. Conversely, decreases in specific-issuer default assumptions or increases in specific-issuer recovery assumptions would result in a higher fair value measurement.  The fair value of certain 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 state and municipal obligations are derived by comparing the securities to current market rates plus an appropriate credit spread to determine an estimated value. Illiquidity spreads are then considered. Credit reviews are performed on each of the issuers. The significant unobservable inputs used in the fair value measurement of the Corporation’s state and municipal obligations are credit spreads related to specific issuers. Significantly higher credit spread assumptions would result in significantly lower fair value measurement.  Conversely, significantly lower credit spreads would result in a significantly higher fair value measurements.

 

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

 

 

 

March 31, 2012

 

 

 

Fair Value Measurements Using Significant

 

 

 

Unobservable Inputs (Level 3)

 

(Dollar amounts in thousands) 

 

Level 1

 

Level 2

 

Level 3

 

Carrying Value

 

U.S. Government sponsored entities and entity mortgage-backed securities

 

$

—

 

$

1,937

 

$

—

 

$

1,937

 

Mortgage Backed Securities-residential

 

—

 

307,864

 

—

 

307,864

 

Mortgage Backed Securities-commercial

 

—

 

$

54

 

—

 

54

 

Collateralized mortgage obligations

 

—

 

152,072

 

—

 

152,072

 

State and municipal

 

—

 

186,569

 

9,525

 

196,094

 

Collateralized debt obligations

 

—

 

—

 

4,486

 

4,486

 

Equities

 

442

 

—

 

1,711

 

2,153

 

TOTAL

 

$

442

 

$

648,496

 

$

15,722

 

$

664,660

 

Derivitive Assets

 

 

 

2,265

 

 

 

 

 

Derivitive Liabilities

 

 

 

(2,265

)

 

 

 

 

 

 

 

December 31, 2011

 

 

 

Fair Value Measurements Using Significant

 

 

 

Unobservable Inputs (Level 3)

 

(Dollar amounts in thousands) 

 

Level 1

 

Level 2

 

Level 3

 

Carrying Value

 

U.S. Government sponsored entities and entity mortgage-backed securities

 

$

—

 

$

4,013

 

$

—

 

$

4,013

 

Mortgage Backed Securities-residential

 

—

 

311,788

 

—

 

311,788

 

Mortgage Backed Securities-commercial

 

—

 

$

101

 

—

 

101

 

Collateralized mortgage obligations

 

—

 

147,947

 

—

 

147,947

 

State and municipal

 

—

 

186,056

 

9,525

 

195,581

 

Collateralized debt obligations

 

—

 

—

 

4,771

 

4,771

 

Equities

 

375

 

—

 

1,711

 

2,086

 

TOTAL

 

$

375

 

$

649,905

 

$

16,007

 

$

666,287

 

Derivitive Assets

 

 

 

2,447

 

 

 

 

 

Derivitive Liabilities

 

 

 

(2,447

)

 

 

 

 

 

There were no transfer between Level 1 and Level 2 during 2012 and 2011.

 

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 months ended March 31, 2012 and December 31, 2011.

 

 

 

 

 

State and

 

Collateralized

 

 

 

 

 

 

 

municipal

 

debt

 

 

 

 

 

Equities

 

obligations

 

obligations

 

Total

 

Beginning balance, January 1

 

$

1,711

 

$

9,525

 

$

4,771

 

$

16,007

 

Total realized/unrealized gains or losses

 

 

 

 

 

 

 

 

 

Included in earnings

 

—

 

—

 

—

 

—

 

Included in other comprehensive income

 

—

 

—

 

(285

)

(285

)

Transfers & Purchases

 

—

 

—

 

—

 

—

 

Settlements

 

—

 

—

 

—

 

—

 

Ending balance, March 31

 

$

1,711

 

$

9,525

 

$

4,486

 

$

15,722

 

 

 

 

 

 

State and

 

Collateralized

 

 

 

 

 

 

 

municipal

 

debt

 

 

 

 

 

Equities

 

obligations

 

obligations

 

Total

 

Beginning balance, January 1

 

$

1,518

 

$

—

 

$

2,190

 

$

3,708

 

Total realized/unrealized gains or losses

 

 

 

 

 

 

 

 

 

Included in earnings

 

—

 

—

 

—

 

—

 

Included in other comprehensive income

 

193

 

—

 

2,581

 

2,774

 

Transfers & Purchases

 

—

 

9,672

 

—

 

9,672

 

Settlements

 

—

 

(147

)

—

 

(147

)

Ending balance, December 31

 

$

1,711

 

$

9,525

 

$

4,771

 

$

16,007

 

 

During 2011 a portion of the Corporation’s municipals with a fair value of $9.7 million were transferred from Level 2 to Level 3 because of a lack of observable market data for these investments.

 

The following table presents quantitative information about recurring Level 3 fair value measurements at March 31, 2012.

 

 

 

Fair Value

 

Valuation Technique(s)

 

Unobservable Input(s)

 

Range

 

Equities

 

$

1,711

 

Recent stock trades

 

Not publicly traded

 

$

78.12

 

 

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

9,525

 

Discounted cash flow

 

Discount rate

 

3.05%-5.50%

 

 

 

 

 

 

 

Probability of default

 

0%

 

Collateralized debt obligations

 

4,486

 

Discounted cash flow

 

Constant prepayment rate

 

1%

 

 

 

 

 

 

 

Expected asset default

 

7.67%-22.27%

 

 

 

 

 

 

 

Expected recoveries

 

15%

 

 

All impaired loans disclosed in footnote 2 are valued at Level 3 and are carried at a fair value of $22.9 million, net of a valuation allowance of $3.2 million at March 31, 2012. At December 31, 2011 impaired loans valued at Level 3 were carried at a fair value of $28.4 million, net of a valuation allowance of $4.3 million. The impact to the provision for loan losses was $(662) thousand for the three months ended March 31, 2012, and was $3.3 million for the year ended December 31, 2011. 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. Appraisals for real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value on the cost to replace current property. The market comparison evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and the investor’s required return. The final fair value is based on a reconciliation of these three approaches. If an appraisal is not available, the fair value may be determined by using a cash flow analysis, a broker’s opinion of value, the net present value of future cash flows, or an observable market price from an active market. Fair value of other real estate is based upon the current appraised values of the properties as determined by qualified licensed appraisers and the Company’s judgment of other relevant market conditions. Appraisals are obtained annually and reductions in value are recorded as a valuation through a charge to expense. The primary unobservable input used by management in estimating fair value are additional discounts to the appraised value to consider selling costs and the age of the appraisal. These discounts range from 5% to20% for costs to sell and marketability. Other real estate and impaired loans carried at fair value are primarily comprised of smaller balance properties. One impaired loan has an estimated fair value of $6.2 million. The collateral securing this loan is a hotel and was appraised based on income and sales comparison approaches. Given the current distressed market, it was difficult for the appraiser to identify recent and relevant comparable sales, therefore the value was based predominantly on the income method which applied a 9.5% capitalization rate to projected net operating income.

 

The following tables presents loans identified as impaired by class of loans as of March 31, 2012 and December 31, 2011.

 

 

 

March 31, 2012

 

(Dollar amounts in thousands)

 

Unpaid
Principal
Balance

 

Allowance
for Loan
Losses
Allocated

 

Fair Value

 

Commercial

 

 

 

 

 

 

 

Commercial & Industrial

 

$

17,920

 

$

2,687

 

$

15,233

 

Farmland

 

891

 

49

 

842

 

Non Farm, Non Residential

 

4,684

 

182

 

4,502

 

Agriculture

 

—

 

—

 

 

 

All Other Commercial

 

1,457

 

74

 

1,383

 

Residential

 

 

 

 

 

 

 

First Liens

 

1,213

 

190

 

1,023

 

Home Equity

 

—

 

—

 

—

 

Junior Liens

 

—

 

—

 

—

 

Multifamily

 

—

 

—

 

—

 

All Other Residential

 

—

 

—

 

—

 

Consumer

 

 

 

 

 

 

 

Motor Vehicle

 

—

 

—

 

—

 

All Other Consumer

 

—

 

—

 

—

 

TOTAL

 

$

26,165

 

$

3,182

 

$

22,983

 

 

 

 

December 31, 2011

 

(Dollar amounts in thousands)

 

Unpaid
Principal
Balance

 

Allowance
for Loan
Losses
Allocated

 

Fair Value

 

Commercial

 

 

 

 

 

 

 

Commercial & Industrial

 

$

17,890

 

$

2,664

 

$

15,226

 

Farmland

 

891

 

49

 

842

 

Non Farm, Non Residential

 

9,260

 

957

 

8,303

 

Agriculture

 

—

 

—

 

 

 

All Other Commercial

 

1,517

 

66

 

1,451

 

Residential

 

 

 

 

 

 

 

First Liens

 

1,963

 

190

 

1,773

 

Home Equity

 

—

 

—

 

—

 

Junior Liens

 

879

 

347

 

532

 

Multifamily

 

250

 

—

 

250

 

All Other Residential

 

—

 

 

 

—

 

Consumer

 

 

 

 

 

 

 

Motor Vehicle

 

—

 

 

 

—

 

All Other Consumer

 

—

 

 

 

—

 

TOTAL

 

$

32,650

 

$

4,273

 

$

28,377

 

 

 

 

March 31, 2012

 

 

 

Fair Value Measurment Using

 

(Dollar amounts in thousands)

 

Carrying Value

 

Level 1

 

Level 2

 

Level 3

 

Other real estate - commercial

 

$

3,914

 

$

—

 

$

—

 

$

3,914

 

Other real estate - residential

 

3,247

 

—

 

—

 

3,247

 

TOTAL

 

$

7,161

 

$

—

 

$

—

 

$

7,161

 

 

 

 

December 31, 2011

 

 

 

Fair Value Measurment Using

 

(Dollar amounts in thousands)

 

Carrying Value

 

Level 1

 

Level 2

 

Level 3

 

Other real estate - commercial

 

$

2,080

 

$

—

 

$

—

 

$

2,080

 

Other real estate - residential

 

2,884

 

—

 

—

 

2,884

 

TOTAL

 

$

4,964

 

$

—

 

$

—

 

$

4,964

 

 

The amounts represent only balances measured at fair value during the period and still held as of the reporting date.

 

The carrying amounts and estimated fair value of financial instruments at March 31, 2012 and December 31, 2011, 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, non-impaired 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 considering credit risk. The valuation of impaired loans was described previously. Loan fair value estimates do not necessarily represent an exit price. 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 Federal Home Loan Bank stock due to restrictions placed on its transferability. For the FDIC indemnification asset the carrying value is the estimated fair value as it represents amounts to be received from the FDIC in the near term. 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:

 

 

 

March 31, 2012

 

 

 

Carrying

 

Fair Value

 

(Dollar amounts in thousands)

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

62,977

 

$

16,798

 

$

46,179

 

$

—

 

$

62,977

 

Federal funds sold

 

108,128

 

—

 

108,128

 

—

 

108,128

 

Securities available—for—sale

 

664,660

 

442

 

648,496

 

15,722

 

664,660

 

Restricted stock

 

21,110

 

n/a

 

n/a

 

n/a

 

n/a

 

Loans, net

 

1,830,884

 

—

 

—

 

1,913,676

 

1,913,676

 

FDIC Indemnification Asset

 

1,802

 

—

 

1,802

 

—

 

1,802

 

Accrued interest receivable

 

11,693

 

—

 

11,693

 

—

 

11,693

 

Deposits

 

(2,279,611

)

—

 

(2,285,523

)

—

 

(2,285,523

)

Short—term borrowings

 

(64,969

)

—

 

(64,969

)

—

 

(64,969

)

Federal Home Loan Bank advances

 

(140,122

)

—

 

(147,746

)

—

 

(147,746

)

Other borrowings

 

(6,147

)

—

 

(6,147

)

—

 

(6,147

)

Accrued interest payable

 

(1,699

)

—

 

(1,699

)

—

 

(1,699

)

 

 

 

December 31, 2011

 

 

 

Carrying

 

Fair

 

(Dollar amounts in thousands)

 

Value

 

Value

 

 

 

 

 

 

 

Cash and due from banks

 

134,280

 

134,280

 

Federal funds sold

 

11,725

 

11,725

 

Securities available—for—sale

 

666,287

 

666,287

 

Restricted stock

 

22,282

 

n/a

 

Loans, net

 

1,874,438

 

1,888,263

 

FDIC Indemnification Asset

 

2,384

 

2,384

 

Accrued interest receivable

 

12,947

 

12,947

 

Deposits

 

(2,274,499

)

(2,279,739

)

Short—term borrowings

 

(100,022

)

(100,022

)

Federal Home Loan Bank advances

 

(140,231

)

(144,089

)

Other borrowings

 

(6,196

)

(6,196

)

Accrued interest payable

 

(1,829

)

(1,829

)