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Fair Value
 3 Months Ended
Mar. 31, 2013
Fair Value Disclosures [Abstract]  
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 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 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, 2013  
    Fair Value Measurements Using Significant  
    Unobservable Inputs (Level 3)  
(Dollar amounts in thousands)   Level 1     Level 2     Level 3     Carrying Value  
U.S. Government entity mortgage-backed securities   $ -     $ 1,793     $ -     $ 1,793  
Mortgage Backed Securities-residential     -       240,694       -       240,694  
Mortgage Backed Securities-commercial     -     $ 4,962       -       4,962  
Collateralized mortgage obligations     -       319,804       -       319,804  
State and municipal     -       189,803       6,502       196,305  
Collateralized debt obligations     -       -       5,972       5,972  
Equities     419       -       0       419  
TOTAL   $ 419     $ 757,056     $ 12,474     $ 769,949  
Derivative Assets             1,876                  
Derivative Liabilities             (1,876 )                

 

 

    December 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 entity mortgage-backed securities   $ -     $ 1,886     $ -     $ 1,886  
Mortgage Backed Securities-residential     -       244,676       -       244,676  
Mortgage Backed Securities-commercial     -     $ 5,131       -       5,131  
Collateralized mortgage obligations     -       233,320       -       233,320  
State and municipal     -       189,574       9,911       199,485  
Collateralized debt obligations     -       -       6,122       6,122  
Equities     380       -       0       380  
TOTAL   $ 380     $ 674,587     $ 16,033     $ 691,000  
Derivative Assets             2,053                  
Derivative Liabilities             (2,053 )                

 

There were no transfer between Level 1 and Level 2 during 2013 and 2012.

 

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, 2013 and December 31, 2012.

 

    Fair Value Measurements Using SignificantUnobservable Inputs (Level 3)  
    March 31, 2013  
    State and     Collateralized        
    municipal     debt        
    obligations     obligations     Total  
Beginning balance, January 1   $ 9,911     $ 6,122     $ 16,033  
Total realized/unrealized gains or losses                        
Included in earnings     -       -       -  
Included in other comprehensive income     -       395       395  
Transfers & Purchases     -       -       -  
Settlements     (3,409 )     (545 )     (3,954 )
Ending balance, March 31   $ 6,502     $ 5,972     $ 12,474  

 

    Fair Value Measurements Using SignificantUnobservable Inputs (Level 3)  
    December 31, 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     (446 )     -       (96 )     (542 )
Included in other comprehensive income     -       -       1,556       1,556  
Transfers & Purchases     -       1,186       -       1,186  
Settlements     (1,265 )     (800 )     (109 )     (2,174 )
Ending balance, December 31   $ -     $ 9,911     $ 6,122     $ 16,033  

 

 

The following table presents quantitative information about recurring Level 3 fair value measurements at March 31, 2013.

 

    Fair Value     Valuation Technique(s)   Unobservable Input(s)   Range  
State and municipal obligations   $ 6,502     Discounted cash flow   Discount rate     3.05%-5.50 %
                Probability of default     0 %
Other real estate     7,752     Sales comparison/income approach   Discount rate for age     5.00%-20.00 %
                of appraisal and market        
                conditions        
Impaired Loans     26,789     Sales comparison/income approach   Discount rate for age        
                of appraisal and market     0.00%-50.00 %
                conditions        

 

All impaired loans disclosed in footnote 2, which are measured for impairment using the fair value of collateral, are valued at Level 3. They are carried at a fair value of $26.8 million, net of a valuation allowance of $10.6 million at March 31, 2013. At December 31, 2012 impaired loans valued at Level 3 were carried at a fair value of $26.0 million, net of a valuation allowance of $7.6 million. The impact to the provision for loan losses was $3.0 million for the three months ended March 31, 2013, and was $4.2 million for the year ended December 31, 2012. Other real estate owned is valued at Level 3. Other real estate owned at March 31, 2013, with a value of $7.8 million was reduced $267 thousand for fair value adjustment. Other real estate owned at December 31, 2012, with a value of $7.7 million was reduced $234 thousand for fair value adjustment.

 

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.

 

The following tables presents loans identified as impaired by class of loans as of March 31, 2013 and December 31, 2012.

 

          March 31, 2013        
(Dollar amounts in thousands)   Carrying
Value		     Allowance
for Loan
Losses
Allocated		     Fair Value  
Commercial                        
Commercial & Industrial   $ 16,570     $ 3,721     $ 12,848  
Farmland     891       191       700  
Non Farm, Non Residential     8,644       1,500       7,143  
Agriculture     -       -          
All Other Commercial     4,326       1,297       3,029  
Residential                        
First Liens     1,253       126       1,127  
Home Equity     196       -       196  
Junior Liens     -       -       -  
Multifamily     5,540       3,794       1,746  
All Other Residential     -       -       -  
Consumer                        
Motor Vehicle     -       -       -  
All Other Consumer     -       -       -  
TOTAL   $ 37,420     $ 10,629     $ 26,789  

 

 
         December 31, 2012        
(Dollar amounts in thousands)   Carrying
Value		     Allowance
for Loan
Losses
Allocated		     Fair Value  
Commercial                        
Commercial & Industrial   $ 17,098     $ 3,153     $ 13,945  
Farmland     891       191       700  
Non Farm, Non Residential     7,386       293       7,093  
Agriculture     -       -          
All Other Commercial     1,209       52       1,157  
Residential                        
First Liens     1,254       126       1,128  
Home Equity     179       -       179  
Junior Liens     -       -       -  
Multifamily     5,540       3,794       1,746  
All Other Residential     -               -  
Consumer                        
Motor Vehicle     -               -  
All Other Consumer     -               -  
TOTAL   $ 33,557     $ 7,609     $ 25,948  

 

    March 31, 2013  
    Fair Value Measurment Using  
(Dollar amounts in thousands)   Carrying Value     Level 1     Level 2     Level 3  
Other real estate - commercial   $ 5,656     $ -     $ -     $ 5,656  
Other real estate - residential     2,096       -       -       2,096  
TOTAL   $ 7,752     $ -     $ -     $ 7,752  

 

    December 31, 2012  
    Fair Value Measurment Using  
(Dollar amounts in thousands)   Carrying Value     Level 1     Level 2     Level 3  
Other real estate - commercial   $ 5,588     $ -     $ -     $ 5,588  
Other real estate - residential     2,134       -       -       2,134  
TOTAL   $ 7,722     $ -     $ -     $ 7,722  

 

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, 2013 and December 31, 2012, 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, 2013                    
    Carrying     Fair Value  
(Dollar amounts in thousands)   Value     Level 1     Level 2     Level 3     Total  
Cash and due from banks   $ 78,399     $ 18,854     $ 59,545     $ -     $ 78,399  
Federal funds sold     54,384       -       54,384       -       54,384  
Securities available—for—sale     769,949       419       757,056       12,474       769,949  
Restricted stock     21,292       n/a       n/a       n/a       n/a  
Loans, net     1,796,259       -       -       1,875,255       1,875,255  
FDIC Indemnification Asset     1,770       -       1,770       -       1,770  
Accrued interest receivable     11,622       -       3,295       8,327       11,622  
Deposits     (2,349,776 )     -       (2,353,844 )     -       (2,353,844 )
Short—term borrowings     (39,952 )     -       (39,952 )     -       (39,952 )
Federal Home Loan Bank advances     (114,608 )     -       (119,103 )     -       (119,103 )
Accrued interest payable     (1,053 )     -       (1,053 )     -       (1,053 )

 

    December 31, 2012                    
    Carrying     Fair Value  
(Dollar amounts in thousands)   Value     Level 1     Level 2     Level 3     Total  
Cash and due from banks   $ 87,230     $ 21,333     $ 65,897     $ -     $ 87,230  
Federal funds sold     20,800       -       20,800       -       20,800  
Securities available—for—sale     691,000       380       674,587       16,033       691,000  
Restricted stock     21,292       n/a       n/a       n/a       n/a  
Loans, net     1,829,978       -       -       1,916,256       1,916,256  
FDIC Indemnification Asset     2,632       -       2,632       -       2,632  
Accrued interest receivable     12,024       -       2,980       9,044       12,024  
Deposits     (2,276,134 )     -       (2,280,910 )     -       (2,280,910 )
Short—term borrowings     (40,551 )     -       (40,551 )     -       (40,551 )
Federal Home Loan Bank advances     (119,705 )     -       (124,933 )     -       (124,933 )
Accrued interest payable     (1,163 )     -       (1,163 )     -       (1,163 )