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FAIR VALUE MEASUREMENT
3 Months Ended
Mar. 31, 2014
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENT
FAIR VALUE MEASUREMENT AND DISCLOSURE
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined using quoted market prices. However, in many instances, quoted market prices are not available. In such instances, fair values are determined using various valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. GAAP 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.
 
GAAP permits an entity to choose to measure eligible financial instruments and other items at fair value. The Company has elected the fair value option for its loans held for sale. Electing the fair value option for loans held for sale enables the Company’s financial position to more clearly align with the economic value of the actively traded asset. The Company did not have any loans held for sale at March 31, 2014 or December 31, 2013.

The fair value hierarchy for valuation of an asset or liability is as follows:
 
Level 1:   Valuation is based upon unadjusted quoted prices in active markets for identical assets and liabilities that the entity has the ability to access as of the measurement date.
 
Level 2:   Valuation is determined from quoted prices for similar assets or liabilities in active markets, from quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market.
 
Level 3:   Valuation is derived from model-based and other techniques in which at least one significant input is unobservable and which may be based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability.
 
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 model-based techniques incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using model-based techniques are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation. 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.

Financial Instruments Recorded at Fair Value on a Recurring Basis
AFS securities:  The fair value is reported utilizing prices provided by an independent pricing service based on recent trading activity and other observable information including, but not limited to, dealer quotes, market spreads, cash flows, market interest rate curves, market consensus prepayment speeds, credit information, and the bond’s terms and conditions. The fair value of debt securities is classified as Level 2.
 
Trading Account Assets:  Trading account assets are invested in mutual funds and classified as Level 1 based upon quoted prices.

Derivatives:  The fair value of interest rate swaps is determined using inputs that are observable in the market place obtained from third parties including yield curves, publicly available volatilities, and floating indexes and, accordingly, are classified as Level 2 inputs. The credit value adjustments associated with derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of March 31, 2014 and December 31, 2013, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives due to collateral postings.
 
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
 
Fair
Value
 
Readily
Available
Market
Prices
(Level 1)
 
Observable
Market
Data
(Level 2)
 
Company
Determined
Fair Value
(Level 3)
March 31, 2014
 
 
 

 
 

 
 

Financial Assets:
 
 
 

 
 

 
 

AFS securities:
 
 
 

 
 

 
 

Obligations of U.S. government sponsored enterprises
$
4,962

 
$

 
$
4,962

 
$

Obligations of states and political subdivisions
29,674

 

 
29,674

 

Mortgage-backed securities issued or guaranteed by U.S. government sponsored enterprises
394,763

 

 
394,763

 

Collateralized mortgage obligations issued or guaranteed by U.S. government sponsored enterprises
361,339

 

 
361,339

 

Private issue collateralized mortgage obligations
6,504

 

 
6,504

 

Trading account assets
2,308

 
2,308

 

 

Customer interest rate swap agreements
142

 

 
142

 

Financial Liabilities:


 
 

 
 
 
 

Interest rate swap agreements
5,577

 

 
5,577

 

Customer interest rate swap agreements
142

 

 
142

 

December 31, 2013
 
 
 

 
 

 
 

Financial Assets:
 
 
 

 
 

 
 

Available-for-sale debt securities:
 
 
 

 
 

 
 

Obligations of states and political subdivisions
$
31,207

 
$

 
$
31,207

 
$

Mortgage-backed securities issued or guaranteed by U.S. government sponsored enterprises
395,903

 

 
395,903

 

Collateralized mortgage obligations issued or guaranteed by U.S. government sponsored enterprises
374,435

 

 
374,435

 

Private issue collateralized mortgage obligations
6,932

 

 
6,932

 

Trading account assets
2,488

 
2,488

 

 

Customer interest rate swap agreements
114

 

 
114

 

Financial Liabilities:
 
 
 

 
 
 
 

Interest rate swap agreements
3,911

 

 
3,911

 

Customer interest rate swap agreements
114

 

 
114

 


 
The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2014. The Company’s policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in transfer between levels.
 
Financial Instruments Recorded at Fair Value on a Nonrecurring Basis 
The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period.
 
Collateral-Dependent Impaired Loans:  Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The Company's policy is to individually evaluate for impairment loans with a principal balance greater than $250,000 and are risk rate 8 or higher or are on non-accrual status. Once the population of loans is identified for individual impairment assessment, the Company measures these loans for impairment by comparing the estimated fair value of the collateral, less the estimated costs to sell (i.e. net realizable value), to the carrying value of the loan. If the estimated net realizable value of the loan is less than the carrying value of the loan, then a loss is recognized as part of the ALL to adjust the loan's carrying value to the estimate net realizable value. Accordingly, certain collateral-dependent impaired loans are subject to measurement at fair value (or net realizable value) on a non-recurring basis. Management has estimated the fair values of these assets using Level 2 inputs, such as the fair value of collateral based on independent third-party market approach appraisals for collateral-dependent loans, and Level 3 inputs where circumstances warrant an adjustment to the appraised value based on the age of the appraisal and/or comparable sales, condition of the collateral, and market conditions.

MSRs:  The Company accounts for mortgage servicing assets at cost, subject to impairment testing. When the carrying value exceeds fair value, a valuation allowance is established to reduce the carrying cost to fair value. Fair value is based on a valuation model that calculates the present value of estimated net servicing income. The Company obtains a third-party valuation based upon loan level data including note rate, type and term of the underlying loans. The model utilizes a variety of observable inputs for its assumptions, the most significant of which are loan prepayment assumptions and the discount rate used to discount future cash flows. Other assumptions include delinquency rates, servicing cost inflation and annual unit loan cost. MSRs are classified within Level 2 of the fair value hierarchy.
 
Non-Financial Assets and Non-Financial Liabilities Recorded at Fair Value
The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Furthermore, the Company does not have any non-financial liabilities measured at fair value on a non-recurring basis. Non-financial assets measured at fair value on a non-recurring basis consist of OREO and goodwill. 

OREO: OREO properties acquired through foreclosure or deed in lieu of foreclosure are recorded at the fair value of the real estate, less costs to sell (i.e. net realizable value). Any write-down of the recorded investment in the related loan is charged to the ALL upon transfer to OREO. Upon acquisition of a property, a current appraisal or a broker’s opinion is used to substantiate fair value of the property. After foreclosure, management periodically, but at least annually, obtains updated valuations of the OREO properties and, if additional impairments are deemed necessary, the subsequent write-downs for declines in value are recorded through a valuation allowance and a provision for losses charged to other non-interest expense within the consolidated statements of income. As management considers appropriate, adjustments are made to the appraisal obtained for the OREO property to account for recent sales activity of comparable properties, changes in the condition of the property, and changes in market conditions. These adjustments are not observable in an active market and classified as Level 3.

Goodwill: Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired. The fair value of goodwill is estimated by utilizing several standard valuation techniques, including discounted cash flow analyses, bank merger multiples, and/or an estimation of the impact of business conditions and investor activities on the long-term value of the goodwill. Should an impairment of either reporting units' goodwill occur the associated goodwill is written-down to fair value and the impairment charge is recorded within non-interest expense in the consolidated statements of income.

As of and for the three months ended March 31, 2014, there have been no indications or triggering events for which management believes that it is more-likely-than-not that goodwill is impaired. In the fourth quarter of 2013, the Company recorded a goodwill impairment of $2.8 million to write-down the financial services reporting unit to fair value of $3.9 million. As such, goodwill for the financial services reporting unit at December 31, 2013 is recorded at fair value. The banking reporting unit was not deemed impaired.

The table below highlights financial and non-financial assets measured and recorded at fair value on a non-recurring basis as of March 31, 2014 and December 31, 2013. Not included in the table below because they are not recorded at fair value are: (i) impaired loans of $21.1 million and $19.4 million at March 31, 2014 and December 31, 2013, respectively; (ii) MSRs reported of $376,000 and $322,000 at March 31, 2014 and December 31, 2013, respectively; and (iii) OREO properties of $613,000 and $612,000 at March 31, 2014 and December 31, 2013, respectively.
 
Fair
Value
 
Readily
Available
Market
Prices
(Level 1)
 
Observable
Market
Data
(Level 2)
 
Company
Determined
Fair Value
(Level 3)
March 31, 2014
 
 
 

 
 

 
 

Financial assets:
 
 
 

 
 

 
 

Collateral-dependent impaired loans
$
5,994

 
$

 
$

 
$
5,994

MSRs(1)
288

 

 
288

 

Non-financial assets:
 
 
 
 
 
 
 
OREO
2,099

 

 

 
2,099

December 31, 2013
 
 
 

 
 

 
 

Financial assets:
 
 
 

 
 

 
 

Collateral-dependent impaired loans
$
8,557

 
$

 
$

 
$
8,557

MSRs(1)
404

 

 
404

 

Non-financial assets:
 
 


 


 


OREO
1,583

 

 

 
1,583

Goodwill - financial services reporting unit
3,904

 

 

 
3,904


(1) Represents MSRs deemed to be impaired and a valuation allowance established to carry at fair value.

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at March 31, 2014 and December 31, 2013:
 
Fair Value
 
Valuation Methodology
 
Unobservable input
 
Discount Range
(Weighted-Average)
March 31, 2014
 
 
 
 
 
 
 
 
Collateral-dependent impaired loans:
 

 
 
 
 
 
 
 
Partially charged-off
$
837

 
Market approach appraisal of collateral
 
Management adjustment of appraisal
 
0 - 89%
(30%)
Specifically reserved(1)
5,157

 
Market approach appraisal of collateral
 
Management adjustment of appraisal
 
0 - 100%
(27%)
OREO
2,099

 
Market approach appraisal of collateral
 
Management adjustment of appraisal
 
0 - 41%
(17%)
 
 
 
 
Estimated selling cost
 
6 - 10%
(9%)
December 31, 2013
 

 
 
 
 
 
 
 
Collateral-dependent impaired loans:
 

 
 
 
 
 
 
 
Partially charged-off
$
1,874

 
Market approach appraisal of collateral
 
Management adjustment of appraisal
 
0 - 85%
(14%)
Specifically reserved(1)
6,683

 
Market approach appraisal of collateral
 
Management adjustment of appraisal
 
7 - 90%
(22%)
OREO
1,583

 
Market approach appraisal of collateral
 
Management adjustment of appraisal
 
0 - 41%
(16%)
 
 
 
 
Estimated selling cost
 
6 - 10%
(10%)
Goodwill
3,904

 
Discounted cash flow
 
Revenue growth rate
 
5.0%
 
 
 
 
 
Margin percentage
 
8.3%
 
 
 
 
 
Discount rate
 
16.5%
 
 
 
 
 
Fair value weighting
 
50.0%
 
 
 
Market approach
 
Fair value weighting
 
50.0%

(1) The specific reserve for collateral-dependent impaired loans is determined by any loan-to-value ratio in excess of 80% for consumer loans and any loan-to-value ratio in excess of 75% for commercial loans. Appraisals are received on impaired loans in accordance with the Company's internal policy. As such, adjustments to the appraised fair value are made, as necessary, should the appraisal not be current. Adjustments are made to the appraised fair value to reflect changes in known factors, including, but not limited to, property condition, property location, and costs to sell the collateral.

GAAP 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 following methods and assumptions were used by the Company in estimating the fair values of its other financial instruments.
 
Cash and Due from Banks:  The carrying amounts reported in the consolidated statements of condition approximate fair value.

HTM securities:  The fair value is estimated utilizing prices provided by an independent pricing service based on recent trading activity and other observable information including, but not limited to, dealer quotes, market spreads, cash flows, market interest rate curves, market consensus prepayment speeds, credit information, and the bond’s terms and conditions. The fair value is classified as Level 2.
 
FHLB and FRB and Investments in CCTA and UBCT:  The carrying amounts reported in the consolidated statements of condition approximate fair value.
 
Loans:  For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. The fair value of other 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.
 
Interest Receivable and Payable:  The carrying amounts reported in the consolidated statements of condition approximate fair value.
 
Deposits:  The fair value of deposits with no stated maturity is equal to the carrying amount. The fair value of certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates and remaining maturities for currently offered certificates of deposit.
 
Borrowings:  The carrying amounts of short-term borrowings from the FHLB, securities sold under repurchase agreements, notes payable and other short-term borrowings approximate fair value. The fair values of long-term borrowings and commercial repurchase agreements are based on the discounted cash flows using current rates for advances of similar remaining maturities.
 
Junior Subordinated Debentures:  The carrying amounts reported in the consolidated statements of condition approximate fair value.

The following table presents the carrying amounts and estimated fair value for financial instrument assets and liabilities measured at March 31, 2014
 
Carrying
Amount
 
Fair Value
 
Readily
Available
Market
Prices
(Level 1)
 
Observable
Market
Prices
(Level 2)
 
Company
Determined
Market
Prices
(Level 3)
Financial assets:
 

 
 

 
 

 
 

 
 

Cash and due from banks
$
51,877

 
$
51,877

 
$
51,877

 
$

 
$

AFS securities
797,242

 
797,242

 

 
797,242

 

HTM securities
6,973

 
6,967

 

 
6,967

 

FHLB and FRB stock
20,417

 
20,417

 
20,417

 

 

Trading account assets
2,308

 
2,308

 
2,308

 

 

Residential real estate loans
561,639

 
574,105

 

 

 
574,105

Commercial real estate loans
569,588

 
569,543

 

 

 
569,543

Commercial loans
183,976

 
182,310

 

 

 
182,310

Home equity loans
266,896

 
268,161

 

 

 
268,161

Consumer loans
16,417

 
16,773

 

 

 
16,773

MSRs(1)
664

 
1,617

 

 
1,617

 

Interest receivable
6,061

 
6,061

 

 
6,061

 

Investments in CCTA and UBCT
1,331

 
1,331

 

 

 
1,331

Customer interest rate swap agreements
142

 
142

 

 
142

 

Financial liabilities:
 

 
 

 
 
 
 
 
 
Deposits
$
1,836,679

 
$
1,839,630

 
$
1,315,062

 
$
524,568

 
$

FHLB advances
56,094

 
59,000

 

 
59,000

 

Commercial repurchase agreements
30,131

 
31,990

 

 
31,990

 

Other borrowed funds
411,218

 
411,282

 
411,282

 

 

Junior subordinated debentures
43,947

 
43,947

 

 
43,947

 

Interest payable
531

 
531

 
531

 

 

Interest rate swap agreements
5,577

 
5,577

 

 
5,577

 

Customer interest rate swap agreements
142

 
142

 

 
142

 

(1) Reported fair value represents all MSRs currently being serviced by the Company, regardless of carrying amount.
The following table presents the carrying amounts and estimated fair value for financial instrument assets and liabilities measured at December 31, 2013:
 
Carrying
Amount
 
Fair Value
 
Readily
Available
Market
Prices
(Level 1)
 
Observable
Market
Prices
(Level 2)
 
Company
Determined
Market
Prices
(Level 3)
Financial assets:
 

 
 

 
 

 
 

 
 

Cash and due from banks
$
51,355

 
$
51,355

 
$
51,355

 
$

 
$

AFS securities
808,477

 
808,477

 

 
808,477

 

FHLB and FRB stock
19,724

 
19,724

 
19,724

 

 

Trading account assets
2,488

 
2,488

 
2,488

 

 

Residential real estate loans
563,425

 
577,153

 

 

 
577,153

Commercial real estate loans
536,107

 
535,961

 

 

 
535,961

Commercial loans
172,105

 
171,432

 

 

 
171,432

Home equity loans
269,888

 
271,041

 

 

 
271,041

Consumer loans
17,287

 
17,662

 

 

 
17,662

MSRs(1)
726

 
1,494

 

 
1,494

 

Interest receivable
5,808

 
5,808

 

 
5,808

 

Investments in CCTA and UBCT
1,331

 
1,331

 

 

 
1,331

Customer interest rate swap agreements
114

 
114

 

 
114

 

Financial liabilities:
 

 
 

 
 
 
 

 
 

Deposits
$
1,813,824

 
$
1,817,199

 
$
1,324,221

 
$
492,978

 
$

FHLB advances
56,112

 
59,118

 

 
59,118

 

Commercial repurchase agreements
30,142

 
32,038

 

 
32,038

 

Other borrowed funds
399,916

 
400,144

 
400,144

 

 

Junior subordinated debentures
43,922

 
43,922

 

 
43,922

 

Interest payable
567

 
567

 
567

 

 

Interest rate swap agreements
3,911

 
3,911

 

 
3,911

 

Customer interest rate swap agreements
114

 
114

 

 
114

 


(1) Reported fair value represents all MSRs currently being serviced by the Company, regardless of carrying amount.