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Fair Value Disclosures and Reporting, Fair Value Option and Fair Value Measurements
 3 Months Ended
Mar. 31, 2013
Fair Value Disclosures [Abstract]  
Fair Value Disclosures and Reporting, the Fair Value Option and Fair Value Measurements
Note 9 – Fair Value Disclosures and Reporting, the Fair Value Option and Fair Value Measurements
 
FASB’s standards on financial instruments, and on fair value measurements and disclosures, require all entities to disclose in their financial statement footnotes the estimated fair values of financial instruments for which it is practicable to estimate such values. In addition to those disclosure requirements, FASB’s standard on investments requires that our debt securities, which are classified as available for sale, and our equity securities that have readily determinable fair values, be measured and reported at fair value in our statement of financial position. Certain impaired loans are also reported at fair value, as explained in greater detail below, and foreclosed assets are carried at the lower of cost or fair value. FASB’s standard on financial instruments permits companies to report certain other financial assets and liabilities at fair value, but we have not elected the fair value option for any additional financial assets or liabilities.                         
 
Fair value measurements and disclosure standards also establish a framework for measuring fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Further, they establish a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standards describe three levels of inputs that may be used to measure fair value:  
 
 
·
Level 1 : Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
 
 
·
Level 2 : Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
 
 
·
Level 3 : Significant unobservable inputs that reflect a company’s own assumptions about the factors that market participants would likely consider in pricing an asset or liability.
 
Fair value estimates are made at a specific point in time based on relevant market data and information about the financial instruments. The estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to realized gains and losses could have a significant effect on fair value estimates but have not been considered in any estimates. Because no market exists for a significant portion of the Company’s financial instruments, fair value disclosures are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. The estimates are subjective and involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented. The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments disclosed at March 31, 2013 and December 31, 2012:
 
 
·
Cash and cash equivalents and fed funds sold : For cash and cash equivalents and fed funds sold, the carrying amount is estimated to be fair value.
 
 
·
Investment securities : The fair values of investment securities are determined by obtaining quoted prices on nationally recognized securities exchanges or by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities by relying on their relationship to other benchmark quoted securities when quoted prices for specific securities are not readily available.
 
 
·
Loans and leases : For variable-rate loans and leases that re-price frequently with no significant change in credit risk or interest rate spread, fair values are based on carrying values. Fair values for other loans and leases are estimated by discounting projected cash flows at interest rates being offered at each reporting date for loans and leases with similar terms, to borrowers of comparable creditworthiness. The carrying amount of accrued interest receivable approximates its fair value.
 
 
·
Loans held for sale : Since loans designated by the Company as available-for-sale are typically sold shortly after making the decision to sell them, realized gains or losses are usually recognized within the same period and fluctuations in fair values are thus not relevant for reporting purposes. If available-for-sale loans stay on our books for an extended period of time, the fair value of those loans is determined using quoted secondary-market prices.
 
 
·
Collateral-dependent impaired loans : Impaired loans carried at fair value are those for which it is probable that the bank will be unable to collect all amounts due (including both interest and principal) according to the contractual terms of the original loan agreement, and the carrying value has been written down to the fair value of the loan. The carrying value is equivalent to the fair value of the collateral, net of expected disposition costs where applicable, for collateral-dependent loans.
 
 
·
Cash surrender value of life insurance policies : The fair values are based on net cash surrender values at each reporting date.
 
·
Investments in, and capital commitments to, limited partnerships : The fair values of our investments in WNC Institutional Tax Credit Fund Limited Partnerships and any other limited partnerships are estimated using quarterly indications of value provided by the general partner. The fair values of undisbursed capital commitments are assumed to be the same as their book values.
 
 
·
Other investments : Certain long-term investments for which no secondary market exists are carried at cost, and the carrying amount for those investments approximates their estimated fair value.
 
 
·
Deposits : Fair values for demand deposits and other non-maturity deposits are equal to the amount payable on demand at the reporting date, which is the carrying amount. Fair values for fixed-rate certificates of deposit are estimated using a cash flow analysis, discounted at interest rates being offered at each reporting date by the Bank for certificates with similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value.
 
 
·
Short-term borrowings : The carrying amounts approximate fair values for federal funds purchased, overnight FHLB advances, borrowings under repurchase agreements, and other short-term borrowings maturing within ninety days of the reporting dates. Fair values of other short-term borrowings are estimated by discounting projected cash flows at the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
 
 
·
Long-term borrowings : The fair values of the Company’s long-term borrowings are estimated using projected cash flows discounted at the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
 
 
·
Subordinated debentures : The fair values of subordinated debentures are determined based on the current market value for like instruments of a similar maturity and structure.
 
 
·
Commitments to extend credit and letters of credit : If funded, the carrying amounts for currently unused commitments would approximate fair values for the newly created financial assets at the funding date. However, because of the high degree of uncertainty with regard to whether or not those commitments will ultimately be funded, fair values for loan commitments and letters of credit in their current undisbursed state cannot reasonably be estimated, and only notional values are disclosed in the table below.
 
Estimated fair values for the Company’s financial instruments at the periods noted are as follows: 
 
Fair Value of Financial Instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands, unaudited)
 
March 31, 2013
 
 
 
 
 
 
Estimated Fair Value
 
 
 
Carrying
Amount
 
 
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
 
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
 
Total
 
Financial Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
47,949
 
$
47,949
 
$
-
 
$
-
 
$
47,949
 
Investment securities available for sale
 
 
398,755
 
 
2,102
 
 
396,653
 
 
-
 
 
398,755
 
Loans and leases, net
 
 
789,709
 
 
-
 
 
839,394
 
 
-
 
 
839,394
 
Collateral dependent impaired loans
 
 
25,520
 
 
-
 
 
25,520
 
 
-
 
 
25,520
 
Loans held-for-sale
 
 
789
 
 
789
 
 
-
 
 
-
 
 
789
 
Cash surrender value of life insurance
    policies
 
 
38,600
 
 
-
 
 
38,600
 
 
-
 
 
38,600
 
Other investments
 
 
6,370
 
 
-
 
 
6,370
 
 
-
 
 
6,370
 
Investment in Limited Partnership
 
 
10,095
 
 
-
 
 
10,095
 
 
-
 
 
10,095
 
Accrued interest receivable
 
 
4,771
 
 
-
 
 
4,771
 
 
-
 
 
4,771
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing
 
$
342,048
 
$
342,048
 
$
-
 
$
-
 
$
342,048
 
Interest-bearing
 
 
813,886
 
 
-
 
 
814,289
 
 
-
 
 
814,289
 
Fed Funds Purchased and Repurchase
    Agreements
 
 
2,673
 
 
-
 
 
2,673
 
 
-
 
 
2,673
 
Short-term borrowings
 
 
6,600
 
 
-
 
 
6,600
 
 
-
 
 
6,600
 
Long-term borrowings
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
Subordinated debentures
 
 
30,928
 
 
-
 
 
19,237
 
 
-
 
 
19,237
 
Limited partnership capital commitment
 
 
962
 
 
-
 
 
962
 
 
-
 
 
962
 
Accrued Interest Payable
 
 
186
 
 
-
 
 
186
 
 
-
 
 
186
 
 
 
 
Notional Amount
 
Off-balance-sheet financial instruments:
 
 
 
 
Commitments to extend credit
 
$
313,907
 
Standby letters of credit
 
 
6,727
 
Commercial lines of credit
 
 
8,536
 
     
 
 
December 31, 2012
 
 
 
 
 
 
Estimated Fair Value
 
 
 
Carrying
Amount
 
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
Financial Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
61,818
 
$
61,818
 
$
-
 
$
-
 
$
61,818
 
Investment securities available for sale
 
 
380,188
 
 
1,809
 
 
378,379
 
 
-
 
 
380,188
 
Loans and leases, net
 
 
839,629
 
 
-
 
 
873,309
 
 
-
 
 
873,309
 
Collateral dependent impaired loans
 
 
27,449
 
 
-
 
 
27,449
 
 
-
 
 
27,449
 
Loans held-for-sale
 
 
210
 
 
210
 
 
-
 
 
-
 
 
210
 
Cash surrender value of life insurance
   policies
 
 
38,007
 
 
-
 
 
38,007
 
 
-
 
 
38,007
 
Other Investments
 
 
6,370
 
 
-
 
 
6,370
 
 
-
 
 
6,370
 
Investment in Limited Partnership
 
 
10,316
 
 
-
 
 
10,316
 
 
-
 
 
10,316
 
Accrued Interest Receivable
 
 
5,095
 
 
-
 
 
5,095
 
 
-
 
 
5,095
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing
 
$
352,597
 
$
352,597
 
$
-
 
$
-
 
$
352,597
 
Interest-bearing
 
 
821,437
 
 
-
 
 
821,911
 
 
-
 
 
821,911
 
Fed Funds Purchased and Repurchase
   Agreements
 
 
1,419
 
 
-
 
 
1,419
 
 
-
 
 
1,419
 
Short-term borrowings
 
 
36,650
 
 
-
 
 
36,650
 
 
-
 
 
36,650
 
Long-term borrowings
 
 
5,000
 
 
-
 
 
5,038
 
 
-
 
 
5,038
 
Subordinated debentures
 
 
30,928
 
 
-
 
 
12,141
 
 
-
 
 
12,141
 
Limited partnership capital commitment
 
 
962
 
 
-
 
 
962
 
 
-
 
 
962
 
Accrued Interest Payable
 
 
304
 
 
-
 
 
304
 
 
-
 
 
304
 
 
 
 
Notional Amount
 
Off-balance-sheet financial instruments:
 
 
 
 
Commitments to extend credit
 
$
225,400
 
Standby letters of credit
 
 
6,690
 
Commercial lines of credit
 
 
8,539
 
  
For financial asset categories that were actually reported at fair value at March 31, 2013 and December 31, 2012, the Company used the following methods and significant assumptions:
 
 
·
Investment Securities : The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges or by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities by relying on the their relationship to other benchmark quoted securities.
   
 
·
Collateral Dependent Impaired loans : Impaired loans carried at fair value are those for which it is probable that the bank will be unable to collect all amounts due (including both interest and principal) according to the contractual terms of the original loan agreement, and the carrying value has been written down to the fair value of the loan. The carrying value is equivalent to the fair value of the collateral based on current appraisals, net of expected disposition costs where applicable, for collateral-dependent loans.
 
 
·
Foreclosed assets : Repossessed real estate (OREO) and other assets are carried at the lower of cost or fair value. Fair value is the appraised value less expected selling costs for OREO and some other assets such as mobile homes, and for all other assets fair value is represented by the estimated sales proceeds as determined using reasonably available sources. Foreclosed assets for which appraisals can be feasibly obtained are periodically measured for impairment using updated appraisals. Fair values for other foreclosed assets are adjusted as necessary, subsequent to a periodic re-evaluation of expected cash flows and the timing of resolution. If impairment is determined to exist, the book value of a foreclosed asset is immediately written down to its estimated impaired value through the income statement, thus the carrying amount is equal to the fair value and there is no valuation allowance.
Assets reported at fair value on a recurring basis are summarized below:
    
Fair Value Measurements - Recurring
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands, unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurements at March 31, 2013, Using
 
 
 
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
Investment Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
 
$
-
 
$
4,684
 
$
-
 
$
4,684
 
Obligations of states and
 
 
 
 
 
 
 
 
 
 
 
 
 
political subdivisions
 
 
-
 
 
81,197
 
 
-
 
 
81,197
 
U.S. Government agencies
 
 
 
 
 
 
 
 
 
 
 
 
 
collateralized by mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
obligations
 
 
-
 
 
310,772
 
 
-
 
 
310,772
 
Other Securities
 
 
2,102
 
 
-
 
 
-
 
 
2,102
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total availabe-for-sale securities
 
$
2,102
 
$
396,653
 
$
-
 
$
398,755
 
   
 
 
Fair Value Measurements at December 31, 2012, Using
 
 
 
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
Investment Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies
 
$
-
 
$
2,973
 
$
-
 
$
2,973
 
Obligations of states and
 
 
 
 
 
 
 
 
 
 
 
 
 
political subdivisions
 
 
-
 
 
73,986
 
 
-
 
 
73,986
 
U.S. Government agencies
 
 
 
 
 
 
 
 
 
 
 
 
 
collateralized by mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
obligations
 
 
-
 
 
301,389
 
 
-
 
 
301,389
 
Other Securities
 
 
1,809
 
 
31
 
 
-
 
 
1,840
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total availabe-for-sale securities
 
$
1,809
 
$
378,379
 
$
-
 
$
380,188
 
 
Assets reported at fair value on a nonrecurring basis are summarized below:
   
Fair Value Measurements - Nonrecurring
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands, unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurements at March 31, 2013, Using
 
 
 
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
Collateral Dependent Impaired Loans
 
$
-
 
$
25,520
 
$
-
 
$
25,520
 
Foreclosed Assets
 
$
-
 
$
15,747
 
$
-
 
$
15,747
 
   
 
 
Fair Value Measurements at December 31, 2012, Using
 
 
 
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
 
Significant
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
Collateral Dependent Impaired Loans
 
$
-
 
$
27,449
 
$
-
 
$
27,449
 
Foreclosed Assets
 
$
-
 
$
19,754
 
$
-
 
$
19,754
 
   
The table above only includes collateral-dependent impaired loan balances for which a specific reserve has been established or on which a write-down has been taken. Information on the Company’s total impaired loan balances, and specific loss reserves associated with those balances, is included in Note 11 below, and in Management’s Discussion and Analysis of Financial Condition and Results of Operation in the “Nonperforming Assets” and “Allowance for Loan and Lease Losses” sections.
 
The unobservable inputs are based on management’s best estimates of appropriate discounts in arriving at fair market value. Significant increases or decreases in any of those inputs could result in a significantly lower or higher fair value measurement. For example, a change in either direction of actual loss rates would have a directionally opposite change in the calculation of the fair value of impaired unsecured loans.