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Fair Value Measurements
 3 Months Ended
Mar. 31, 2012
Fair Value Measurements [Abstract]  
Fair Value Measurements

(9.) FAIR VALUE MEASUREMENTS

Determination of Fair Value – Assets Measured at Fair Value on a Recurring and Nonrecurring Basis Valuation Hierarchy

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. ASC Topic 820, "Fair Value Measurements and Disclosures," establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. There have been no changes in the valuation techniques used during the current period. The fair value hierarchy is as follows:

  • Level 1 - 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 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, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
  • Level 3 - 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.

Transfers between levels of the fair value hierarchy are recorded as of the end of the reporting period. 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 internally developed 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 and 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. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

 

Securities available for sale: Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, 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.

 

Loans held for sale: The fair value of loans held for sale is determined using quoted secondary market prices and investor commitments. Loans held for sale are classified as Level 2 in the fair value hierarchy.

 

Collateral dependent impaired loans: Fair value of impaired loans with specific allocations of the allowance for loan losses is measured based on the value of the collateral securing these loans and is classified as Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable and collateral value is determined based on appraisals performed by qualified licensed appraisers hired by the Company. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised and reported values may be discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the client and client's business. Such discounts are typically significant and result in a Level 3 classification of the inputs for determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

 

Mortgage servicing rights: Mortgage servicing rights do not trade in an active market with readily observable market data. As a result, the Company estimates the fair value of mortgage servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. The assumptions used in the discounted cash flow model are those that we believe market participants would use in estimating future net servicing income, including estimates of loan prepayment rates, servicing costs, ancillary income, impound account balances, and discount rates. The significant unobservable inputs used in the fair value measurement of the Company's mortgage servicing rights are the constant prepayment rates and weighted average discount rate. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. Although the constant prepayment rate and the discount rate are not directly interrelated, they will generally move in opposite directions. Mortgage servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.

 

Other real estate owned (Foreclosed assets): Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. The appraisals are sometimes further discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the client and client's business. Such discounts are typically significant and result in a Level 3 classification of the inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

 

Assets Measured at Fair Value

The following table presents for each of the fair-value hierarchy levels the Company's assets that are measured at fair value on a recurring and non-recurring basis as of the dates indicated (in thousands).

                 
    Quoted Prices in            
    Active Markets   Significant        
    for Identical   Other   Significant    
    Assets or   Observable   Unobservable    
    Liabilities   Inputs   Inputs    
    (Level 1)   (Level 2)   (Level 3)   Total
March 31, 2012                
Measured on a recurring basis:                
Securities available for sale:                
U.S. Government agencies and government sponsored enterprises $ - $ 106,611 $ - $ 106,611
State and political subdivisions   -   145,289   -   145,289
Mortgage-backed securities   -   446,031   -   446,031
Asset-backed securities:                
Trust preferred securities   -   1,505   -   1,505
Other   -   61   -   61
  $ - $ 699,497 $ - $ 699,497
Measured on a nonrecurring basis:                
Loans:                
Loans held for sale $ - $ 2,053 $ - $ 2,053
Collateral dependent impaired loans   -   -   1,874   1,874
Other assets:                
Mortgage servicing rights   -   -   1,835   1,835
Other real estate owned   -   -   258   258
  $ - $ 2,053 $ 3,967 $ 6,020
 
 
December 31, 2011                
Measured on a recurring basis:                
Securities available for sale:                
U.S. Government agencies and government sponsored enterprises $ - $ 97,712 $ - $ 97,712
State and political subdivisions   -   124,424   -   124,424
Mortgage-backed securities   -   403,685   -   403,685
Asset-backed securities:                
Trust preferred securities   -   -   1,636   1,636
Other   -   61   -   61
  $ - $ 625,882 $ 1,636 $ 627,518
Measured on a nonrecurring basis:                
Loans:                
Loans held for sale $ - $ 2,410 $ - $ 2,410
Collateral dependent impaired loans   -   -   2,160   2,160
Other assets:                
Mortgage servicing rights   -   -   1,973   1,973
Other real estate owned   -   -   475   475
  $ - $ 2,410 $ 4,608 $ 7,018

 

There were no transfers between level 1 and 2 for the three months ended March 31, 2012. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the three month periods ended March 31, 2012 and 2011.

The following table presents additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level 3 inputs to determine fair value (dollars in thousands).

             
    Fair     Unobservable Input  
Asset   Value Valuation Technique Unobservable Input Value or Range  
Collateral dependent impaired loans $ 1,874 Appraisal of collateral (1) Appraisal adjustments (2) 40% - 100% discount  
      Discounted cash flow Discount rate 5.2 % (3)
        Risk premium rate 11.3 % (3)
 
Mortgage servicing rights   1,835 Discounted cash flow Discount rate 4.4 % (3)
        Constant prepayment rate 30.4 % (3)
 
Other real estate owned   258 Appraisal of collateral (1) Appraisal adjustments (2) 25% - 49% discount  

 

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

(3) Weighted averages.

Changes in Level 3 Fair Value Measurements

The reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows for the periods indicated (in thousands):

             
    Three months ended  
    March 31,  
    2012     2011  
Securities available for sale, beginning of period $ 1,636   $ 572  
Sales   (360 )   -  
Principal paydowns and other   -     110  
Total gains (losses) realized/unrealized:            
Included in earnings   331     -  
Included in other comprehensive income   (102 )   (115 )
Transfers from Level 3 to Level 2   (1,505 )   -  
Securities available for sale, end of period $ -   $ 567  

 

During the three months ended March 31, 2012, the Company transferred $1.5 million of assets out of Level 3, consisting of pooled trust preferred securities. The transfers of the pooled trust preferred securities out of Level 3 was primarily the result of using observable pricing information or a third party pricing quote that appropriately reflects the fair value of those securities, without the need for adjustment based on our own assumptions regarding the characteristics of a specific security or the current liquidity in the market.

Disclosures about Fair Value of Financial Instruments

 

The assumptions used below are expected to approximate those that market participants would use in valuing these financial instruments.

 

Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial instrument, including estimates of timing, amount of expected future cash flows and the credit standing of the issuer. Such estimates do not consider the tax impact of the realization of unrealized gains or losses. In some cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial instrument. Care should be exercised in deriving conclusions about our business, its value or financial position based on the fair value information of financial instruments presented below.

 

Securities held to maturity: The fair value of the Company's investment securities held to maturity is primarily measured using information from a third-party 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.

 

Loans: The fair value of the Company's loans was estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made for the same remaining maturities. Loans were first segregated by type such as commercial, residential mortgage, and consumer, and were then further segmented into fixed and variable rate and loan quality categories. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.

 

Time deposits: The fair value of time deposits was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. The fair values of the Company's time deposit liabilities do not take into consideration the value of the Company's long-term relationships with depositors, which may have significant value.

 

The following presents (in thousands) the carrying amount, estimated fair value, and placement in the fair value hierarchy of the Company's financial instruments as of March 31, 2012 and December 31, 2011. This table excludes financial instruments whose fair value was determined utilizing Level 1 inputs and for which the carrying amount approximates fair value. Financial assets for which the fair value approximates carrying value include cash and cash equivalents and accrued interest receivable. Financial liabilities for which the fair value approximates carrying value include non-maturity deposits, short-term borrowings and accrued interest payable.

                     
          Fair Value Measurements
        Estimated            
    Carrying   Fair Level 1   Level 2   Level 3
    Amount   Value Inputs   Inputs   Inputs
March 31, 2012                    
Financial assets:                    
Securities held to maturity $ 24,196 $ 24,797 $ - $ 24,797 $ -
Loans (1)   1,497,265   1,521,329   -   -   1,521,329
FHLB and FRB stock   9,504   9,504   -   9,504   -
 
Financial liabilities:                    
Time deposits   695,928   697,665   -   697,665   -
 
 
December 31, 2011                    
Financial assets:                    
Securities held to maturity $ 23,297 $ 23,964 $ - $ 23,964 $ -
Loans (1)   1,461,516   1,493,159   -   -   1,493,159
FHLB and FRB stock   10,674   10,674   -   10,674   -
 
Financial liabilities:                    
Time deposits   700,676   702,720   -   702,720   -

 

(1) Comprised of loans (including collateral dependent impaired loans), net of deferred loan costs and the allowance for loan losses.