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Fair Value
 9 Months Ended
Sep. 30, 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 obtained from a third party provider without adjustment. As described previously, management obtains values from other pricing sources to validate the Standard & Poors pricing that they currently utilize. 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 measurement.

 

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

 

 

 

September 30, 2012

 

 

 

Fair Value Measurements Using Significant

 

 

 

Unobservable Inputs (Level 3)

 

(Dollar amounts in thousands) 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

U.S. Government agencies

 

$

—

 

$

1,884

 

$

—

 

$

1,884

 

Mortgage Backed Securities-residential

 

—

 

282,519

 

—

 

282,519

 

Mortgage Backed Securities-commercial

 

—

 

49

 

—

 

49

 

Collateralized mortgage obligations

 

—

 

165,075

 

—

 

165,075

 

State and municipal

 

—

 

191,910

 

9,911

 

201,821

 

Collateralized debt obligations

 

—

 

—

 

4,805

 

4,805

 

Equities

 

353

 

—

 

—

 

353

 

TOTAL

 

$

353

 

$

641,437

 

$

14,716

 

$

656,506

 

Derivative Assets

 

 

 

2,220

 

 

 

 

 

Derivative Liabilities

 

 

 

(2,220

)

 

 

 

 

 

 

 

December 31, 2011

 

 

 

Fair Value Measurements Using Significant

 

 

 

Unobservable Inputs (Level 3)

 

(Dollar amounts in thousands) 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

U.S. Government agencies

 

$

—

 

$

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

 

Derivative Assets

 

 

 

2,447

 

 

 

 

 

Derivative Liabilities

 

 

 

(2,447

)

 

 

 

 

 

There were no transfers 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 and nine months ended September 30, 2012 and the year ended December 31, 2011.

 

 

 

Fair Value Measurements Using SignificantUnobservable Inputs (Level 3)

 

 

 

Three months ended September 30, 2012

 

 

 

 

 

State and

 

Collateralized

 

 

 

 

 

 

 

municipal

 

debt

 

 

 

 

 

Equities

 

obligations

 

obligations

 

Total

 

Beginning balance, July 1

 

$

—

 

$

10,066

 

$

4,379

 

$

14,445

 

Total realized/unrealized gains or losses

 

 

 

 

 

 

 

 

 

Included in earnings

 

—

 

—

 

—

 

—

 

Included in other comprehensive income

 

—

 

—

 

426

 

426

 

Transfers & Purchases

 

—

 

—

 

—

 

—

 

Settlements

 

—

 

(155

)

—

 

(155

)

Ending balance, September 30

 

$

—

 

$

9,911

 

$

4,805

 

$

14,716

 

 

 

 

 

Fair Value Measurements Using SignificantUnobservable Inputs (Level 3)

 

 

 

Nine months ended September 30, 2012

 

 

 

 

 

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

 

435

 

—

 

(285

)

150

 

Included in other comprehensive income

 

(446

)

—

 

655

 

209

 

Transfers & Purchases

 

—

 

1,186

 

—

 

1,186

 

Settlements

 

(1,700

)

(800

)

(336

)

(2,836

)

Ending balance, September 30

 

$

—

 

$

9,911

 

$

4,805

 

$

14,716

 

 

 

 

 

Fair Value Measurements Using SignificantUnobservable Inputs (Level 3)

 

 

 

 

 

December 31, 2011

 

 

 

 

 

 

 

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

 

 

The following table presents quantitative information about recurring and non-recurring Level 3 fair value measurements at September 30, 2012.

 

 

 

Fair Value

 

Valuation Technique(s)

 

Unobservable Input(s)

 

Range

 

State and municipal obligations

 

$

9,911

 

Discounted cash flow

 

Discount rate

 

3.05%-5.50%

 

 

 

 

 

 

 

Probability of default

 

0%

 

Other real estate

 

$

8,670

 

Sales comparison/income approach

 

Discount rate for age of appraisal and market conditions

 

5.00%-20.00%

 

Impaired Loans

 

28,984

 

Sales comparison/income approach

 

Discount rate for age of appraisal and market conditions

 

0.00%-50.00%

 

 

All impaired loans disclosed in footnote 2 are valued at Level 3 and are carried at a fair value of $29.0 million, net of a valuation allowance of $5.7 million at September 30, 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 $1.1 million and $1.8 million for the three and nine months ended September 30, 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, which are based on management’s past experience in resolving these types of properties. 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 $5.3 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 September 30, 2012 and December 31, 2011, which are all considered Level 3.

 

 

 

September 30, 2012

 

(Dollar amounts in thousands)

 

Unpaid
Principal
Balance

 

Allowance
for Loan
Losses
Allocated

 

Fair Value

 

Commercial

 

 

 

 

 

 

 

Commercial & Industrial

 

$

17,885

 

$

3,925

 

$

13,960

 

Farmland

 

891

 

49

 

842

 

Non Farm, Non Residential

 

7,581

 

182

 

7,399

 

Agriculture

 

—

 

—

 

—

 

All Other Commercial

 

1,315

 

56

 

1,259

 

Residential

 

 

 

 

 

 

 

First Liens

 

1,255

 

190

 

1,065

 

Home Equity

 

197

 

—

 

197

 

Junior Liens

 

—

 

—

 

—

 

Multifamily

 

5,540

 

1,278

 

4,262

 

All Other Residential

 

—

 

—

 

—

 

Consumer

 

 

 

 

 

 

 

Motor Vehicle

 

—

 

—

 

—

 

All Other Consumer

 

—

 

—

 

—

 

TOTAL

 

$

34,664

 

$

5,680

 

$

28,984

 

 

 

 

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

 

 

 

 

September 30, 2012

 

 

 

Fair Value Measurment Using

 

(Dollar amounts in thousands) 

 

Carrying Value

 

Level 1

 

Level 2

 

Level 3

 

Other real estate - commercial

 

$

6,198

 

$

—

 

$

—

 

$

6,198

 

Other real estate - residential

 

2,472

 

—

 

—

 

2,472

 

TOTAL

 

$

8,670

 

$

—

 

$

—

 

$

8,670

 

 

 

 

 

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 carrying amounts and estimated fair value of financial instruments at September 30, 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.

 

 

 

September 30, 2012

 

 

 

Carrying

 

Fair Value

 

(Dollar amounts in thousands)

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

63,638

 

$

18,484

 

$

45,154

 

$

—

 

$

63,638

 

Federal funds sold

 

55,773

 

—

 

55,773

 

—

 

55,773

 

Securities available—for—sale

 

656,506

 

353

 

641,437

 

14,716

 

656,506

 

Restricted stock

 

21,296

 

n/a

 

n/a

 

n/a

 

n/a

 

Loans, net

 

1,836,704

 

—

 

 

 

1,929,537

 

1,929,537

 

FDIC Indemnification Asset

 

1,602

 

—

 

1,602

 

—

 

1,602

 

Accrued interest receivable

 

12,785

 

—

 

4,041

 

8,744

 

12,785

 

Deposits

 

(2,259,670

)

—

 

(2,264,791

)

—

 

(2,264,791

)

Short—term borrowings

 

(43,997

)

—

 

(43,997

)

—

 

(43,997

)

Federal Home Loan Bank advances

 

(119,814

)

—

 

(126,065

)

—

 

(126,065

)

Other borrowings

 

(6,049

)

—

 

(6,049

)

—

 

(6,049

)

Accrued interest payable

 

(1,211

)

—

 

(1,211

)

—

 

(1,211

)

 

 

 

 

 

 

 

 

 

 

 

 

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

)