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Fair Value
9 Months Ended
Sep. 30, 2011
Fair Value [Abstract] 
Fair Value

Note 12. Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal, or most advantageous, market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

The fair value hierarchy is as follows:

 

     
Level 1 Inputs –   Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
   
Level 2 Inputs –   Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, such as interest rates, volatilities, prepayment speeds, and credit risks, or inputs that are derived principally from or corroborated by market data by correlation or other means.
   
Level 3 Inputs –   Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s assets and liabilities carried at fair value. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon third party models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities Available-for-Sale: Securities classified as available-for-sale are reported at fair value utilizing Level 1 and Level 2 inputs. Securities are classified as Level 1 within the valuation hierarchy when quoted prices are available in an active market. This includes securities whose value is based on quoted market prices in active markets for identical assets. The Company also uses Level 1 inputs for the valuation of equity securities traded in active markets.

Securities are classified as Level 2 within the valuation hierarchy when the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U. S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other things. Level 2 inputs are used to value U. S. Agency securities, mortgage-backed securities, municipal securities, single issue trust preferred securities, pooled trust preferred securities, and certain equity securities that are not actively traded.

Other Assets and Associated Liabilities: Securities held for trading purposes are recorded at fair value and included in “other assets” on the consolidated balance sheets. Securities held for trading purposes include assets related to employee deferred compensation plans. The assets associated with these plans are generally invested in equities and classified as Level 1. Deferred compensation liabilities, also classified as Level 1, are carried at the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets.

Derivatives: Derivatives are reported at fair value utilizing Level 2 inputs. The Company obtains dealer quotations based on observable data to value its derivatives.

Impaired Loans: Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on appraisals adjusted for customized discounting criteria.

The Company maintains an active and robust problem credit identification system. When a credit is identified as exhibiting characteristics of weakening, the Company will assess the credit for potential impairment. Examples of weakening include delinquency and deterioration of the borrower’s capacity to repay as determined by the Company’s regular credit review function. As part of the impairment review, the Company will evaluate the current collateral value. It is the Company’s standard practice to obtain updated third party collateral valuations to assist management in measuring potential impairment of a credit and the amount of the impairment to be recorded.

Internal collateral valuations are generally performed within two to four weeks of the original identification of potential impairment and receipt of the third party valuation. The internal valuation is performed by comparing the original appraisal to current local real estate market conditions and experience with consideration of liquidation costs. The result of the internal valuation is compared to the outstanding loan balance, and, if warranted, a specific impairment reserve will be established at the completion of the internal evaluation.

A third party evaluation is typically received within thirty to forty-five days of the completion of the internal evaluation. Once received, the third party evaluation is reviewed by Special Assets staff and/or Credit Appraisal staff for reasonableness. Once the evaluation is reviewed and accepted, discounts to fair market value are applied based upon such factors as the bank’s historical liquidation experience of like collateral, and an estimated net realizable value is established. That estimated net realizable value is then compared to the outstanding loan balance to determine the amount of specific impairment reserve. The specific impairment reserve, if necessary, is adjusted to reflect the results of the updated evaluation. A specific impairment reserve is generally maintained on impaired loans during the time period while awaiting receipt of the third party evaluation as well as on impaired loans that continue to make some form of payment and liquidation is not imminent. Impaired loans not meeting the aforementioned criteria and that do not have a specific impairment reserve have usually been previously written down through a partial charge-off, to their net realizable value.

Generally, the only difference between current appraised value, adjusted for liquidation costs, and the carrying amount of the loan less the specific reserve is any downward adjustment to the appraised value that the Company determines appropriate. These differences generally consist of costs to sell the property, as well as a deflator for the devaluation of property seen by bank sellers. The Company considers these factors in fair value adjustments.

In the Company’s experience, it rarely returns loans to performing status after they have been partially charged off. Generally, credits identified as impaired move quickly through the process towards ultimate resolution.

Other Real Estate Owned. The fair value of the Company’s other real estate owned is determined using current and prior appraisals, estimates of costs to sell, and proprietary qualitative adjustments. Accordingly, other real estate owned is stated at a Level 3 fair value.

 

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2011, and December 31, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

                                 
    September 30, 2011  
    Fair Value Measurements Using     Total  
(In Thousands)   Level 1     Level 2     Level 3     Fair Value  

Available-for-sale securities:

                                

Agency mortgage-backed securities

   $ —       $ 254,420     $ —       $ 254,420  

Non-Agency Alt-A residential MBS

     —         10,598       —         10,598  

State and political subdivisions

     —         130,019       —         130,019  

Corporate FDIC insured

     —         13,775       —         13,775  

Single issue trust preferred securities

     —         40,041       —         40,041  

Equity securities

     514       20       —         534  
   

 

 

    

 

 

    

 

 

    

 

 

  

Total available-for-sale securities

   $ 514     $ 448,873     $ —       $ 449,387  
   

 

 

    

 

 

    

 

 

    

 

 

  

Deferred compensation assets

   $ 2,930     $ —       $ —       $ 2,930  
   

 

 

    

 

 

    

 

 

    

 

 

  

Derivative assets

                                

Interest rate lock commitments

     —         122       —         122  
   

 

 

    

 

 

    

 

 

    

 

 

  

Total derivative assets

   $ —       $ 122     $ —       $ 122  
   

 

 

    

 

 

    

 

 

    

 

 

  

Deferred compensation liabilities

   $ 2,930     $ —       $ —       $ 2,930  
   

 

 

    

 

 

    

 

 

    

 

 

  

Derivative liabilities

                                

Interest rate lock commitments

     —         9       —         9  
   

 

 

    

 

 

    

 

 

    

 

 

  

Total derivative liabilities

   $ —       $ 9     $ —       $ 9  
   

 

 

    

 

 

    

 

 

    

 

 

  

 

                                 
    December 31, 2010  
    Fair Value Measurements Using     Total  
(In Thousands)   Level 1     Level 2     Level 3     Fair Value  

Available-for-sale securities:

                                

U.S. Government agency securities

   $ —       $ 9,832     $ —       $ 9,832  

Agency mortgage-backed securities

     —         215,013       —         215,013  

Non-Agency Alt-A residential MBS

     —         11,277       —         11,277  

States and political subdivisions

     —         176,138       —         176,138  

Corporate FDIC insured

             25,660               25,660  

Single issue trust preferred securities

     —         41,244       —         41,244  

Pooled trust preferred securities

     —         264       —         264  

Equity securities

     616       20       —         636  
   

 

 

    

 

 

    

 

 

    

 

 

  

Total available-for-sale securities

   $ 616     $ 479,448     $ —       $ 480,064  
   

 

 

    

 

 

    

 

 

    

 

 

  

Deferred compensation assets

   $ 3,192     $ —       $ —       $ 3,192  
   

 

 

    

 

 

    

 

 

    

 

 

  

Derivative assets

                                

Interest rate lock commitments

     —         28       —         28  
   

 

 

    

 

 

    

 

 

    

 

 

  

Total derivative assets

   $ —       $ 28     $ —       $ 28  
   

 

 

    

 

 

    

 

 

    

 

 

  

Deferred compensation liabilities

   $ 3,192     $ —       $ —       $ 3,192  
   

 

 

    

 

 

    

 

 

    

 

 

  

Derivative liabilities

                                

Interest rate swap

     —         31       —         31  

Interest rate lock commitments

     —         59       —         59  
   

 

 

    

 

 

    

 

 

    

 

 

  

Total derivative liabilities

   $ —       $ 90     $ —       $ 90  
   

 

 

    

 

 

    

 

 

    

 

 

  

 

Certain financial and non-financial assets are measured at fair value on a nonrecurring basis; thus, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, such as, when there is evidence of impairment. Items subject to nonrecurring fair value adjustments at September 30, 2011, and December 31, 2010, are as follows:

 

                                 
    September 30, 2011  
    Fair Value Measurements Using     Total  
(In Thousands)   Level 1     Level 2     Level 3     Fair Value  

Impaired loans

   $ —       $ —       $ 10,291     $ 10,291  

Restructured loans

     —         —         6,524       6,524  

Other real estate owned

     —         —         5,942       5,942  
   
    December 31, 2010  
    Fair Value Measurements Using     Total  
(In Thousands)   Level 1     Level 2     Level 3     Fair Value  

Impaired loans

   $ —       $ —       $ 10,906     $ 10,906  

Restructured loans

     —         —         5,771       5,771  

Other real estate owned

     —         —         4,910       4,910  

Fair Value of Financial Instruments

Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another financial instrument. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price if one exists.

 

                                 
    September 30, 2011     December 31, 2010  
    Carrying           Carrying        
(In Thousands)   Amount     Fair Value     Amount     Fair Value  

Assets

                                

Cash and cash equivalents

   $ 148,320     $ 148,320     $ 112,189     $ 112,189  

Investment securities

     452,729       452,771       484,701       484,768  

Loans held for sale

     3,575       3,625       4,694       4,700  

Loans held for investment, less allowance

     1,348,249       1,373,731       1,359,724       1,370,173  

Accrued interest receivable

     6,264       6,264       7,675       7,675  

Bank owned life insurance

     43,970       43,970       42,241       42,241  

Derivative financial assets

     122       122       28       28  

Deferred compensation assets

     2,930       2,930       3,192       3,192  
         

Liabilities

                                

Demand deposits

   $ 233,683     $ 233,683     $ 205,151     $ 205,151  

Interest-bearing demand deposits

     295,804       295,804       262,420       262,420  

Savings deposits

     396,767       396,767       426,547       426,547  

Time deposits

     664,237       680,996       726,837       735,332  

Securities sold under agreements to repurchase

     139,510       160,293       140,894       161,100  

Accrued interest payable

     2,754       2,754       3,264       3,264  

FHLB and other indebtedness

     165,941       184,001       191,193       203,539  

Derivative financial liabilities

     9       9       90       90  

Deferred compensation liabilities

     2,930       2,930       3,192       3,192  

 

The following summary presents the methodologies and assumptions used to estimate the fair value of the Company’s financial instruments presented below. The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different.

Cash and Cash Equivalents: The book values of cash and due from banks and federal funds sold and purchased are considered to be equal to fair value as a result of the short-term nature of these items.

Investment Securities and Deferred Compensation Assets and Liabilities: Fair values are determined in the same manner as described above.

Loans: The estimated fair value of loans held for investment is measured based upon discounted future cash flows using current rates for similar loans. Loans held for sale are recorded at lower of cost or estimated fair value. The fair value of loans held for sale is determined based upon the market sales price of similar loans.

Accrued Interest Receivable and Payable: The book value is considered to be equal to the fair value due to the short-term nature of the instrument.

Bank-owned Life Insurance: The fair value is determined by stated contract values.

Derivative Financial Instruments: The estimated fair value of derivative financial instruments is based upon the current market price for similar instruments.

Deposits and Securities Sold Under Agreements to Repurchase: Deposits without a stated maturity, including demand, interest-bearing demand, and savings accounts, are reported at their carrying value. No value has been assigned to the franchise value of these deposits. For other types of deposits and repurchase agreements with fixed maturities and rates, fair value has been estimated by discounting future cash flows based on interest rates currently being offered on instruments with similar characteristics and maturities.

FHLB and Other Indebtedness: Fair value has been estimated based on interest rates currently available to the Company for borrowings with similar characteristics and maturities. The fair value for trust preferred obligations has been estimated based on credit spreads seen in the marketplace for like issues.

Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees: The amount of off-balance sheet commitments to extend credit, standby letters of credit, and financial guarantees is considered equal to fair value. Because of the uncertainty involved in attempting to assess the likelihood and timing of commitments being drawn upon, coupled with the lack of an established market and the wide diversity of fee structures, the Company does not believe it is meaningful to provide an estimate of fair value that differs from the given value of the commitment.