Disclosures Regarding Fair Value

3 Months Ended

Mar. 31, 2013

Disclosures Regarding Fair Value

18. Disclosures Regarding Fair Value

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables summarize assets and liabilities measured at fair value on a recurring basis at the dates indicated aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).

	March 31, 2013
	Level 1		Level 2		Level 3		Total
Assets
Investment securities available for sale
State and municipal	$	—	$	11,116	$	—	$	11,116
Collateralized mortgage obligations (federal agencies)		—		129,361		—		129,361
Other mortgage-backed (federal agencies)		—		61,767		—		61,767
SBA loan-backed (federal agency)		43,180		20,374		—		63,554
Derivative financial instruments		—		350		—		350
Total assets measured at fair value on a recurring basis	$	43,180	$	222,968	$	—	$	266,148
Liabilities
Derivative financial instruments	$	—	$	61	$	—	$	61
	December 31, 2012
	Level 1		Level 2		Level 3		Total
Assets
Investment securities available for sale
State and municipal	$	—	$	11,530	$	—	$	11,530
Collateralized mortgage obligations (federal agencies)		14,057		109,451		—		123,508
Other mortgage-backed (federal agencies)		—		63,817		—		63,817
SBA loan-backed (federal agency)		44,683		20,964		—		65,647
Derivative financial instruments		—		370		—		370
Total assets measured at fair value on a recurring basis	$	58,740	$	206,132	$	—	$	264,872
Liabilities
Derivative financial instruments	$	—	$	5	$	—	$	5

For disclosure regarding the fair value of Pension Plan assets, see Note 13, Benefit Plans.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

For financial assets measured at fair value on a nonrecurring basis that are recorded in the Consolidated Balance Sheets, the following tables summarize the level of valuation assumptions used to determine fair value of the related individual assets at the dates indicated (in thousands). There were no liabilities measured at fair value on a nonrecurring basis at March 31, 2013 or December 31, 2012.

	March 31, 2013
	Level 1		Level 2		Level 3		Total
Assets
Mortgage loans held for sale	$	—	$	7,056	$	—	$	7,056
Other loans held for sale		—		800		—		800
Impaired loans in gross loans		—		6,049		1,073		7,122
Foreclosed real estate and repossessed personal property		105		650		8,528		9,283
Long-lived assets held for sale		—		—		685		685
Total assets measured at fair value on a nonrecurring basis	$	105	$	14,555	$	10,286	$	24,946
	December 31, 2012
	Level 1		Level 2		Level 3		Total
Assets
Mortgage loans held for sale	$	—	$	6,114	$	—	$	6,114
Other loans held for sale		800		—		—		800
Impaired loans in gross loans		—		6,285		189		6,474
Foreclosed real estate and repossessed personal property		—		817		9,163		9,980
Long-lived assets held for sale		—		—		685		685
Total assets measured at fair value on a nonrecurring basis	$	800	$	13,216	$	10,037	$	24,053

Level 3 Valuation Methodologies. Following is a description of the unobservable inputs used for Level 3 fair value measurements.

Impaired loans. The fair value of an impaired loan is estimated using one of three methods: value of the underlying collateral, present value of expected cash flows and, in rare cases, the market value of the impaired loan itself. An allowance for loan losses or charge-off is recorded for the excess of the Company’s recorded investment in the loan over the loan’s estimated fair value. In the case of a collateral dependent impaired loan, any allowance for loan losses or charge-off is increased by estimated selling costs. Impaired loans not requiring an allowance for loan losses or charge-off represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. Impaired loans, where an allowance for loan losses or charge-off is recorded based on the fair value of collateral, require classification in the fair value hierarchy. When the fair value of the collateral is based on an executed sales contract with an independent third party, the Company records the impaired loan as nonrecurring Level 1. If the collateral is based on another observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or the Company determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Foreclosed real estate and repossessed personal property. Foreclosed real estate and repossessed personal property is carried at the lower of carrying value or fair value less estimated selling costs. For purposes of classification in the fair value hierarchy, fair value of foreclosed real estate and repossessed property is generally based upon binding sales contracts, current appraisals, comparable sales and other estimates of value obtained principally from independent sources. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the asset as nonrecurring Level 2. However, the Company also considers other factors or recent developments which could result in adjustments to the collateral value estimates indicated in the appraisals such as changes in absorption rates or market conditions from the time of valuation. In situations where management adjustments are significant to the fair value measurement in its entirety, such measurements are classified as Level 3 within the valuation hierarchy.

Long-lived assets held for sale. Nonrecurring fair value adjustments on long-lived assets held for sale reflect impairment writedowns. Appraisals are used to determine impairment, and these appraisals may require significant adjustments to market-based valuation inputs due to lack of recent comparable sales or the age of the appraisal. As a result, the assets subjected to nonrecurring fair value adjustments are typically classified as Level 3 due to the fact that unobservable inputs are significant to the fair value measurement.

The following table summarizes the significant unobservable inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis at March 31, 2013 (in thousands).

	Fair value at March  31, 2013		Valuation technique	Significant unobservable inputs
Assets
Impaired loans in gross loans	$	1,073	Internal assessment of collateral value	Adjustments to estimated value based on recent sales of comparable collateral
Foreclosed real estate and repossessed personal property		8,528	Appraisals of collateral value	Adjustments to appraisal for age of comparable sales
Long-lived assets held for sale		685	Internal valuation	Appraisals and/or sales of comparable properties

Carrying Amounts and Estimated Fair Value of Financial Assets and Liabilities Not Measured at Fair Value

The following table summarizes the carrying amount and fair value for other financial instruments included in the Consolidated Balance Sheets at the dates indicated (in thousands) all of which are considered Level 3 fair value estimates. These fair value estimates are subject to fluctuation based on the amount and timing of expected cash flows as well as the choice of discount rate used in the present value calculation. The Company used management’s best estimate of fair value based on the methodologies described above. Thus, the fair values presented may not be the amounts that could be realized in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses that would be incurred in an actual sale or settlement are not taken into consideration in the fair values presented.

	Carrying amount		Fair value
March 31, 2013
Financial instruments—assets Loans (1)	$	709,812	$	716,675
Financial instruments—liabilities Deposits		972,196		968,767
December 31, 2012
Financial instruments—assets Loans (1)	$	716,977	$	724,005
Financial instruments—liabilities Deposits		1,023,242		1,020,446

(1) Includes Loans, net less impaired loans valued based on the fair value of underlying collateral or contracted sales price which are included in the “Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis” table.