Note 19 - Fair Value Measurements
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. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. FASB ASC Topic 820 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. 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, credit risks, etc.) 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 those Company assets and liabilities that are carried at fair value.
There were no transfers between levels during the year ended December 31, 2011.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable data. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect, among other things, counterparty credit quality and the company’s creditworthiness 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.
Securities Available for Sale. Securities classified as available for sale are reported at fair value utilizing level 1 and level 2 measurements. For corporate debt, mutual funds and equity securities, unadjusted quoted prices in active markets for identical assets are utilized to determine fair value at the measurement date and have been classified as level 1 in the ASC 820 fair value hierarchy. For all other securities, the Company obtains fair value measurements from an independent pricing service. The independent pricing service evaluations are based on market data. The independent pricing service utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information. Because many fixed income securities do not trade on a daily basis, the independent pricing service evaluated pricing applications apply available information as applicable through processes such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations. In addition, the independent pricing service uses model processes, such as the Option Adjusted Spread model to assess interest rate impact and develop prepayment scenarios. The models and processes take into account market convention. For each asset class, a team of evaluators gathers information from market sources and integrates relevant credit information, perceived market movements and sector news into the evaluated pricing applications and models.
The market inputs that the independent pricing service normally seeks for evaluations of securities, listed in approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The independent pricing service also monitors market indicators, industry and economic events. Information of this nature is a trigger to acquire further market data. For certain security types, additional inputs may be used, or some of the market inputs may not be applicable. Evaluators may prioritize inputs differently on any given day for any security based on market conditions, and not all inputs listed are available for use in the evaluation process for each security evaluation on a given day. Because the data utilized was observable, the securities have been classified as level 2 in the ASC 820 fair value hierarchy.
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
|
|
Inputs |
|
Inputs |
|
Inputs |
|
Fair Value |
|
|
|
(dollars in thousands) |
|
2011 |
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
— |
|
$ |
46,035 |
|
$ |
— |
|
$ |
46,035 |
|
Obligations of U.S. government corporations and agencies |
|
— |
|
349,031 |
|
— |
|
349,031 |
|
Obligations of states and political subdivisions |
|
— |
|
154,437 |
|
— |
|
154,437 |
|
Residential mortgage-backed securities |
|
— |
|
278,115 |
|
— |
|
278,115 |
|
Corporate debt securities |
|
2,583 |
|
— |
|
— |
|
2,583 |
|
Mutual funds and other equity securities |
|
1,548 |
|
— |
|
— |
|
1,548 |
|
|
|
$ |
4,131 |
|
$ |
827,618 |
|
$ |
— |
|
$ |
831,749 |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
— |
|
$ |
381 |
|
$ |
— |
|
$ |
381 |
|
Obligations of U.S. government corporations and agencies |
|
— |
|
333,135 |
|
— |
|
333,135 |
|
Obligations of states and political subdivisions |
|
— |
|
76,935 |
|
— |
|
76,935 |
|
Residential mortgage-backed securities |
|
— |
|
183,006 |
|
— |
|
183,006 |
|
Corporate debt securities |
|
1,499 |
|
— |
|
— |
|
1,499 |
|
Mutual funds and other equity securities |
|
4,503 |
|
— |
|
— |
|
4,503 |
|
|
|
$ |
6,002 |
|
$ |
593,457 |
|
$ |
— |
|
$ |
599,459 |
|
Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
Impaired Loans. The Company does not record loans at fair value on a recurring basis. However, periodically, a loan is considered impaired and is reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral. Impaired loans measured at fair value typically consist of loans on non-accrual status and restructured loans in compliance with modified terms. Collateral values are estimated using a combination of observable inputs, including recent appraisals and unobservable inputs based on customized discounting criteria. Due to the significance of the level 3 inputs, all impaired loan fair values have been classified as level 3.
Foreclosed Assets. Non-financial assets and non-financial liabilities measured at fair value include foreclosed assets (upon initial recognition or subsequent impairment). Foreclosed assets are measured using a combination of observable inputs, including recent appraisals and unobservable inputs based on customized discounting criteria. Due to the significance of the unobservable inputs, all foreclosed asset fair values have been classified as level 3 in the ASC 820 fair value hierarchy.
The following table summarizes assets and liabilities measured at fair value on a non-recurring basis as of December 31, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
|
|
Inputs |
|
Inputs |
|
Inputs |
|
Fair Value |
|
|
|
(dollars in thousands) |
|
2011 |
|
|
|
|
|
|
|
|
|
Impaired loans |
|
$ |
— |
|
$ |
— |
|
$ |
4,905 |
|
$ |
4,905 |
|
Foreclosed assets |
|
— |
|
— |
|
794 |
|
794 |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
Impaired loans |
|
$ |
— |
|
$ |
— |
|
$ |
12,149 |
|
$ |
12,149 |
|
Foreclosed assets |
|
— |
|
— |
|
310 |
|
310 |
|
FASB ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The estimated fair value approximates carrying value for accrued interest. The methodologies for other financial assets and financial liabilities are discussed below:
Loans held for sale
Fair value of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices.
Fair values for on-balance-sheet commitments to originate loans held for sale are based on fees currently charged to enter into similar agreements, and for fixed-rate commitments also consider the difference between current levels of interest rates and the committed rates. The fair value of interest-rate lock commitments are considered immaterial.
Loans
Our performing loan portfolio consists of variable rate and fixed rate loans. For variable rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying amount. For certain homogeneous categories of loans, such as some residential mortgages, fair value is estimated using the quoted market prices for similar loans or securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Fair value of impaired loans is discussed above.
Deposits and securities sold under agreements to repurchase
The fair value of demand deposits, savings accounts, interest-bearing transaction accounts, and certain money market deposits is defined as the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently offered for deposits of similar remaining maturities. The carrying amounts reported in the balance sheet for securities sold under agreements to repurchase approximate those liabilities’ fair values.
Long-term debt
Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.
Junior subordinated debt owed to unconsolidated trusts
Rates currently available to the Company for instruments with similar terms and remaining maturities are used to estimate fair value of existing fixed rate instruments. For variable rate instruments, fair values are based on carrying values.
Commitments to extend credit and standby letters of credit
The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. As of December 31, 2011 and 2010, these items are insignificant.
The estimated fair values of the Company’s financial instruments at December 31 are as follows:
|
|
2011 |
|
2010 |
|
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|
|
Amount |
|
Value |
|
Amount |
|
Value |
|
|
|
(dollars in thousands) |
|
Financial assets: |
|
|
|
|
|
|
|
|
|
Securities |
|
$ |
831,749 |
|
$ |
831,749 |
|
$ |
599,459 |
|
$ |
599,459 |
|
Loans held for sale |
|
15,249 |
|
15,569 |
|
49,684 |
|
50,331 |
|
Loans, net |
|
1,977,589 |
|
2,008,603 |
|
2,243,055 |
|
2,282,681 |
|
Accrued interest receivable |
|
11,121 |
|
11,121 |
|
12,633 |
|
12,633 |
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
2,763,454 |
|
$ |
2,773,599 |
|
$ |
2,916,366 |
|
$ |
2,928,240 |
|
Securities sold under agreements to repurchase |
|
127,867 |
|
127,867 |
|
138,982 |
|
138,982 |
|
Long-term debt |
|
19,417 |
|
20,138 |
|
43,159 |
|
44,934 |
|
Junior subordinated debt owed to unconsolidated trusts |
|
55,000 |
|
55,000 |
|
55,000 |
|
54,547 |
|
Accrued interest payable |
|
1,881 |
|
1,881 |
|
3,408 |
|
3,408 |
|
Other assets and liabilities of the Company that are not defined as financial instruments are not included in the above disclosures, such as property and equipment. Also, nonfinancial instruments typically not recognized in financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earning potential of core deposit accounts, the earnings potential of loan servicing rights, the earnings potential of the trust operations, customer goodwill and similar items. |