NOTE 7. FAIR VALUE MEASUREMENT

Fair value estimates are based on quoted market prices, if available, quoted market prices of similar assets or liabilities, or the present value of expected future cash flows and other valuation techniques. These valuations are significantly affected by discount rates, cash flow assumptions, and risk assumptions used. Therefore, fair value estimates may not be substantiated by comparison to independent markets and are not intended to reflect the proceeds that may be realizable in an immediate settlement of the instruments.

Fair value is determined at one point in time and is not representative of future value. These amounts do not reflect the total value of a going concern organization. Management does not have the intention to dispose of a significant portion of its assets and liabilities and therefore, the unrealized gains or losses should not be interpreted as a forecast of future earnings and cash flows.

The following is a discussion of assets and liabilities measured at fair value on a recurring basis and valuation techniques applied:

Securities available-for-sale: The fair value of securities available-for-sale which are measured on a recurring basis are determined primarily by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely 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 similar securities. These securities are classified within level 1 or 2 in the fair value hierarchy. Certain equity securities that are lightly traded in over-the-counter markets are classified as level 2 in the fair value hierarchy, as quoted market prices may not be available on the fair value measurement date. Positions that are not traded in active markets for which valuations are generated using assumptions not observable in the market or management’s best estimate are classified within level 3 of the fair value hierarchy. This includes certain specific municipal debt issues for which the credit quality and discount rate must be estimated.

We may be required from time to time to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.

Impaired loans: Impaired loans are carried at the lower of cost or the fair value of the collateral for collateral-dependent loans. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The use of independent appraisals, discounted cash flow models and management’s best judgment are significant inputs in arriving at the fair value measure of the underlying collateral and impaired loans are therefore classified within level 3 of the fair value hierarchy.

Other real estate owned and repossessed assets: Other real estate owned and repossessed assets are carried at the lower of the investment in the assets or the fair value of the assets less estimated selling costs. The use of independent appraisals and management’s best judgment are significant inputs in arriving at the fair value measure of the underlying collateral, and therefore other real estate owned and repossessed assets are classified within level 3 of the fair value hierarchy.

Mortgage servicing rights: The fair value of mortgage servicing rights is based on an independent valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions based on management’s best judgment that are significant inputs to the discounting calculations. If the carrying value exceeds fair value, they are considered impaired and are classified within level 3 of the fair value hierarchy as a result.

Loans held for sale: Loans held for sale are carried, in aggregate, at the lower of cost or fair value. The use of a valuation model using quoted prices of similar instruments are significant inputs in arriving at the fair value and therefore loans held for sale are classified within level 2 of the fair value hierarchy.

The following tables set forth WesBanco’s financial assets and liabilities that were accounted for at fair value on a recurring and nonrecurring basis by level within the fair value hierarchy as of September 30, 2013 and December 31, 2012:


			September 30, 2013
			Fair Value Measurements Using:
*(unaudited, in thousands)*	September 30, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring fair value measurements
Securities - available-for-sale
Obligations of government agencies	$	70,657	$	—	$	70,657	$	—
Residential mortgage-backed securities and collateralized mortgage obligations of government agencies		681,011		—		681,011		—
Obligations of state and political subdivisions		128,232		—		128,232		—
Corporate debt securities		41,582		—		41,582		—
Equity securities		11,973		9,443		2,530		—

Total securities - available-for-sale	$	933,455	$	9,443	$	924,012	$	—

Total recurring fair value measurements	$	933,455	$	9,443	$	924,012	$	—


Nonrecurring fair value measurements
Impaired loans	$	835	$	—	$	—	$	835
Other real estate owned and repossessed assets		5,184		—		—		5,184
Mortgage servicing rights		897		—		—		897
Loans held for sale		6,601		—		6,601		—

Total nonrecurring fair value measurements	$	13,517	$	—	$	6,601	$	6,916


			December 31, 2012
			Fair Value Measurements Using:
*(unaudited, in thousands)*	December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring fair value measurements
Securities - available-for-sale
Obligations of government agencies	$	96,612	$	—	$	96,612	$	—
Residential mortgage-backed securities and collateralized mortgage obligations of government agencies		732,210		—		732,210		—
Obligations of state and political subdivisions		148,635		—		148,612		23
Corporate debt securities		32,685		—		32,685		—
Equity securities		11,102		9,059		2,043		—

Total securities - available-for-sale	$	1,021,244	$	9,059	$	1,012,162	$	23

Total recurring fair value measurements	$	1,021,244	$	9,059	$	1,012,162	$	23


Nonrecurring fair value measurements
Impaired loans	$	3,866	$	—	$	—	$	3,866
Other real estate owned and repossessed assets		5,988		—		—		5,988
Mortgage servicing rights		825		—		—		825
Loans held for sale		21,903		—		21,903		—

Total nonrecurring fair value measurements	$	32,582	$	—	$	21,903	$	10,679

WesBanco’s policy is to recognize transfers between levels as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers between level 1 and level 2 for the nine months ended September 30, 2013.

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which WesBanco has utilized level 3 inputs to determine fair value:


	Quantitative Information about Level 3 Fair Value Measurements
*(unaudited, dollars in thousands)*	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
September 30, 2013:
Impaired loans	$	835	Appraisal of collateral ⁽¹⁾	Appraisal adjustments ⁽²⁾	0% to (43.4)% / (15.4)%
				Liquidation expenses ⁽²⁾	0% to (8.0)% / (5.0)%
Other real estate owned and repossessed assets		5,184	Appraisal of collateral ^(1), ⁽³⁾
Mortgage servicing rights		897	Discounted cash flow	Remaining term	2.6 yrs to 26.0 yrs / 15.1 yrs
				Discount rate	9.0% to 12.0% / 9.8%
December 31, 2012:
Impaired loans	$	3,866	Appraisal of collateral ⁽¹⁾	Appraisal adjustments ⁽²⁾	0% to (50.8%) / (13.7%)
				Liquidation expenses ⁽²⁾	(3.9%) to (8.0%) / (6.8%)
Other real estate owned and repossessed assets		5,988	Appraisal of collateral ^(1), ⁽³⁾
Mortgage servicing rights		825	Discounted cash flow	Remaining term	2.8 yrs to 27.0 yrs / 15.8 yrs
				Discount rate	9.0% to 12.0% / 9.8%

⁽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. The range and weighted average of appraisal adjustments and liquidation expenses are presented as a percent of the appraisal.

⁽³⁾	Includes estimated liquidation expenses and numerous dissimilar qualitative adjustments by management which are not identifiable.

The estimated fair values of WesBanco’s financial instruments are summarized below:


					Fair Value Measurements
*(unaudited, in thousands)*	Carrying Amount		Fair Value Estimate		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2013:
Financial Assets
Cash and due from banks	$	145,639	$	145,639	$	145,639	$	—	$	—
Securities available-for-sale		933,455		933,455		9,443		924,012		—
Securities held-to-maturity		602,588		607,215		—		606,462		753
Net loans		3,789,196		3,720,889		—		—		3,720,889
Loans held for sale		6,601		6,601		—		6,601		—
Accrued interest receivable		19,903		19,903		19,903		—		—
Bank owned life insurance		120,457		120,457		120,457		—		—

Financial Liabilities
Deposits		5,060,442		5,075,556		3,421,995		1,653,561		—
Federal Home Loan Bank borrowings		59,918		63,338		—		63,338		—
Other borrowings		124,179		126,973		77,746		49,227		—
Junior subordinated debt		106,127		66,390		—		66,390		—
Accrued interest payable		3,535		3,535		3,535		—		—

December 31, 2012:
Financial Assets
Cash and due from banks	$	125,605	$	125,605	$	125,605	$	—	$	—
Securities available-for-sale		1,021,244		1,021,244		9,059		1,012,162		23
Securities held-to-maturity		602,509		639,273		—		638,469		804
Net loans		3,635,063		3,600,068		—		—		3,600,068
Loans held for sale		21,903		21,903		—		21,903		—
Accrued interest receivable		19,354		19,354		19,354		—		—
Bank owned life insurance		119,671		119,671		119,671		—		—

Financial Liabilities
Deposits		4,944,284		4,963,356		3,294,664		1,668,692		—
Federal Home Loan Bank borrowings		111,187		114,461		—		114,461		—
Other borrowings		142,971		142,753		95,768		46,985		—
Junior subordinated debt		113,832		64,624		—		64,624		—
Accrued interest payable		3,856		3,856		3,856		—		—

The following methods and assumptions were used to measure the fair value of financial instruments recorded at cost on WesBanco’s consolidated balance sheets:

Cash and due from banks: The carrying amount for cash and due from banks is a reasonable estimate of fair value.

Securities held-to-maturity: Fair values for securities held-to-maturity are determined in the same manner as securities available-for-sale which is described above.

Net loans: Fair values for loans are estimated using a discounted cash flow methodology. The discount rates take into account interest rates currently being offered to customers for loans with similar terms, and the credit risk associated with the loan and market factors, including liquidity. The valuation of the loan portfolio reflects discounts that WesBanco believes are consistent with transactions occurring in the marketplace for both performing and distressed loan types. The carrying value that fair value is compared to is net of the allowance for loan losses and other associated premiums and discounts. Due to the significant judgment involved in evaluating credit quality, loans are classified within level 3 of the fair value hierarchy.

Accrued interest receivable: The carrying amount of accrued interest receivable approximates its fair value.

Bank-owned life insurance: The carrying value of bank-owned life insurance represents the net cash surrender value of the underlying insurance policies, should these policies be terminated. Management believes that the carrying value approximates its fair value.

Deposits: The carrying amount is considered a reasonable estimate of fair value for demand, savings and other variable rate deposit accounts. The fair value of fixed maturity certificates of deposit is estimated by a discounted cash flow method using the rates currently offered for deposits of similar remaining maturities.

Federal Home Loan Bank borrowings: The fair value of FHLB borrowings is based on rates currently available to WesBanco for borrowings with similar terms and remaining maturities.

Other borrowings: The carrying amount of federal funds purchased and overnight sweep accounts generally approximate fair value. Other repurchase agreements are based on quoted market prices if available. If market prices are not available for certain fixed and adjustable rate repurchase agreements, then quoted market prices of similar instruments are used.

Junior subordinated debt owed to unconsolidated subsidiary trusts: Due to the pooled nature of these instruments, which are not actively traded, estimated fair value is based on broker prices from recent similar sales.

Accrued interest payable: The carrying amount of accrued interest payable approximates its fair value.

Off-balance sheet financial instruments: Off-balance sheet financial instruments consist of commitments to extend credit including letters of credit. Fair values for commitments to extend credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit standing of the counterparties. The estimated fair value of the commitments to extend credit and letters of credit are insignificant and therefore are not presented in the above tables.