Fair Values Of Assets And Liabilities

9 Months Ended

Sep. 30, 2011

Fair Values Of Assets And Liabilities [Abstract]

Fair Values Of Assets And Liabilities

19. Fair Values of Assets and Liabilities

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale, derivative assets, certain FHLB advances hedged by interest rate swaps designated as fair value hedges, and mortgage servicing rights are recorded at fair value on a recurring basis. Additionally, from time-to-time, the Company may be required to record at fair value other assets and liabilities on a nonrecurring basis, such as loans held for sale, loans held for investment, impaired loans and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets or liabilities.

Fair Value Hierarchy

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3: Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

Investments Securities Available-for-Sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 may include asset-backed securities in less liquid markets.

Liquidity is a significant factor in the determination of the fair values of available-for-sale debt securities. Market price quotes may not be readily available for some positions, or positions within a market sector where trading activity has slowed significantly or ceased. Some of these instruments are valued using a discounted cash flow model, which estimates the fair value of the securities using internal credit risk, interest rate and prepayment risk models that incorporate management's best estimate of current key assumptions such as default rates, loss severity and prepayment rates. Principal and interest cash flows are discounted using an observable discount rate for similar instruments with adjustments that management believes a market participant would consider in determining fair value for the specific security. Underlying assets are valued using external pricing services, where available, or matrix pricing based on the vintages and ratings. Situations of illiquidity generally are triggered by the market's perception of credit uncertainty regarding a single company or a specific market sector. In these instances, fair value is determined based on limited available market information and other factors, principally from reviewing the issuer's financial statements and changes in credit ratings made by one or more ratings agencies.

Loans Held for Sale

The majority of loans held for sale are carried at the lower of cost or market value. The sold loans are beyond the reach of the Company in all respects and the purchasing investor has all rights of ownership, including the ability to pledge or exchange the loans. Most of the loans sold are without recourse. Gains or losses on loan sales are recognized at the time of sale, are determined by the difference between net sales proceeds and the carrying value of the loan sold, and are included in Consolidated Statements of Operations.

Since loans held for sale are carried at the lower of cost or market value, the market value of loans held for sale is based on contractual agreements with independent third-party buyers. As such, the Company classifies loans subjected to nonrecurring fair value adjustments as Level 2.

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and the related impairment is charged against the allowance or a specific allowance is established. 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. Once a loan is identified as impaired, management determines the fair value of the loan to quantify impairment, should such exist. The fair value of impaired loans is estimated using one of several methods, including collateral net liquidation value, market value of similar debt, enterprise value, and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of the expected repayments or collateral meet or exceed the recorded investments in such loans. At September 30, 2011 and December 31, 2010, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established 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 observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 3. When an appraised value is not available or management 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 loans as nonrecurring Level 3.

Other Real Estate Owned

OREO is adjusted to fair value upon transfer of the loans to OREO. Subsequently, OREO is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management's estimation of the value of the collateral. Given the lack of observable market prices for identical properties, the Company records the OREO as nonrecurring Level 3.

Derivative Assets and Liabilities

Substantially all derivative instruments held or issued by the Company for risk management or customer-initiated activities are traded in over-the-counter markets where quoted market prices are not readily available. For those derivatives, the Company measures fair value using models that use primarily market observable inputs, such as yield curves and option volatilities, and include the value associated with counterparty credit risk. The Company classifies derivatives instruments held or issued for risk management or customer-initiated activities as Level 2.

Mortgage Servicing Rights

Mortgage servicing rights are recorded at fair value on a recurring basis, with changes in fair value recorded as a component of mortgage loan sales. A valuation model, which utilizes a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a discount rate, is used to determine fair value. Loan servicing rights are adjusted to fair value through a valuation allowance as determined by the model. As such, the Company classifies mortgage servicing rights as Level 3. Pursuant to an agreement dated December 29, 2010, the Bank sold its mortgage servicing rights on mortgages owned by Fannie Mae and transferred the servicing of those mortgages on January 31, 2011.

Federal Home Loan Bank Advances

Three FHLB Advances totaling $30.0 million have been hedged through fair value hedges whereby the change in fair value of the advances is effectively offset by the change in fair value of the interest rate swaps. For those derivatives, the Company measures fair value using models that use primarily market observable inputs, such as yield curves and option volatilities, and include the value associated with counterparty credit risk. The Company classifies derivatives instruments held or issued for risk management or customer-initiated activities as Level 2. Fair value of derivatives are primarily estimated by discounting estimated cash flows using interest rates approximating the current market rate for similar terms and credit risk.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Assets and liabilities carried at fair value on a recurring basis at September 30, 2011 for continuing operations, including financial instruments that the Company accounts for under the fair value option, are summarized in the following table:

(dollars in thousands)	Total		Level 1		Level 2		Level 3
Assets:
Available-for-sale debt securities:
U.S. government sponsored agencies	$	4,609	$	—	$	4,609	$	—
States and political subdivisions		2,194		—		2,194		—
Residential mortgage-backed securities-GSE		192,468		—		192,468		—
Total available-for-sale securities		199,271		—		199,271		—
Fair value of interest rate swaps		810		—		810		—
Total assets at fair value from continuing operations	$	200,081	$	—	$	200,081	$	—
Liabilities:
FHLB advances—fair value hedge	$	484	$	—	$	484	$	—
Total liabilities at fair value from continuing operations	$	484	$	—	$	484	$	—

Assets and liabilities carried at fair value on a recurring basis at December 31, 2010 for continuing operations, including financial instruments that the Company accounts for under the fair value option, are summarized in the following table:

		$0000000		$0000000		$0000000		$0000000
(dollars in thousands)	Total		Level 1		Level 2		Level 3
Assets:
Available-for-sale debt securities:
U.S. Treasury and government agencies	$	21	$	—	$	21	$	—
U.S. government sponsored agencies		23,516		—		23,516		—
States and political subdivisions		24,458		—		24,458		—
Residential mortgage-backed securities-GSE		257,336		—		257,336		—
Total available-for-sale securities		305,331		—		305,331		—
Mortgage servicing rights		2,359		—		—		2,359
Fair value of interest rate swaps		1,415		—		1,415		—
Total assets at fair value from continuing operations	$	309,105	$	—	$	306,746	$	2,359
Liabilities:
FHLB advances—fair value hedge	$	1,076	$	—	$	1,076	$	—
Total liabilities at fair value from continuing operations	$	1,076	$	—	$	1,076	$	—

Assets and liabilities carried at fair value on a recurring basis at December 31, 2010 for discontinued operations, including financial instruments which the Company accounts for under the fair value option, are summarized in the following table:

		$0000000		$0000000		$0000000		$0000000
(dollars in thousands)	Total		Level 1		Level 2		Level 3
Assets:
Loans held for sale	$	16,119	$	—	$	16,119	$	—
Derivative assets—Dover		44		—		44		—
Total assets at fair value from discontinued operations	$	16,163	$	—	$	16,163	$	—
Liabilities:
Derivative liabilities—Dover	$	55	$	—	$	55	$	—
Total liabilities at fair value from discontinued operations	$	55	$	—	$	55	$	—

The following tables present a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the periods indicated.

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Mortgage Servicing Rights
(dollars in thousands)	For Three Months Ended
	September 30, 2011		September 30, 2010
Beginning balance at July 1, 2011	$	—	$	4,751
Total gains or losses (realized/unrealized):
Included in earnings		—		(199	)
Purchases, issuances and settlements		—		377
Servicing rights sold		—		—
Ending balance	$	—	$	4,929

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Mortgage Servicing Rights
(dollars in thousands)	For Nine Months Ended
	September 30, 2011			September 30, 2010
Beginning balance at January 1, 2011	$	2,359		$	4,857
Total gains or losses (realized/unrealized):
Included in earnings		(117	)		(888	)
Purchases, issuances and settlements		—			960
Servicing rights sold		(2,242	)		—
Ending balance	$	—		$	4,929

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.

Assets measured at fair value on a nonrecurring basis are included in the following table at September 30, 2011 for continuing operations:

		$000.000		$000.000		$000.000		$000.000
(dollars in thousands)	Total		Level 1		Level 2		Level 3
Loans held for sale	$	25,661	$	—	$	25,661	$	—
Impaired loans		50,887		—		—		50,887
Other real estate owned		43,839		—		—		43,839
Total assets at fair value from continuing operations	$	120,387	$	—	$	25,661	$	94,726

Assets measured at fair value on a nonrecurring basis are included in the following table at December 31, 2010 for continuing operations:

		$000.000		$000.000		$000.000		$000.000
(dollars in thousands)	Total		Level 1		Level 2		Level 3
Impaired loans	$	137,152	$	—	$	—	$	137,152
Other real estate owned		19,173		—		—		19,173
Total assets at fair value from continuing operations	$	156,325	$	—	$	—	$	156,325

Assets measured at fair value on a nonrecurring basis are included in the following table at September 30, 2011 for discontinued operations:

		$000.000		$000.000		$000.000		$000.000
(dollars in thousands)	Total		Level 1		Level 2		Level 3
Loans held for sale	$	233	$	—	$	233	$	—
Other real estate owned		—		—		—		—
Total assets at fair value from discontinued operations	$	233	$	—	$	233	$	—

Assets measured at fair value on a nonrecurring basis are included in the following table at December 31, 2010 for discontinued operations:

		$000.000.00		$000.000.00		$000.000.00		$000.000.00
(dollars in thousands)	Total		Level 1		Level 2		Level 3
Other real estate owned	$	168	$	—	$	—	$	168
Total assets at fair value from discontinued operations	$	168	$	—	$	—	$	168

Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value for each class of the Company's financial instruments.

Cash and cash equivalents. The carrying amounts for cash and due from banks approximate fair value because of the short maturities of those instruments.

Investment securities. The fair value of investment securities is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. The fair value of equity investments in the restricted stock of the FRBR and FHLB approximates the carrying value.

Loans. The fair value of fixed rate 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. Substantially all residential mortgage loans held for sale are pre-sold and their carrying value approximates fair

value. The fair value of variable rate loans with frequent repricing and negligible credit risk approximates book value. The fair value of loans is further discounted by credit and liquidity factors.

Accrued interest receivable and payable. The carrying amounts of accrued interest approximate fair value.

Bank-owned life insurance. The carrying value of bank-owned life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the insurer.

Interest Rate Swaps. Interest rate swaps are recorded at fair value on a recurring basis. Fair value measurement is based on discounted cash flow models. All future floating case flows are projected and both floating and fixed cash flows are discounted to the valuation date.

Deposits. The fair value of noninterest-bearing and interest-bearing demand deposits and savings are the amounts payable on demand because these products have no stated maturity. The fair value of time deposits is estimated using the rates currently offered for deposits of similar remaining maturities.

Borrowed funds. The carrying value of retail repurchase agreements and federal funds purchased is considered to be a reasonable estimate of fair value. The fair value of Federal Home Loan Bank advances and other borrowed funds is estimated using the rates currently offered for advances of similar remaining maturities.

Subordinated debt . The fair value of the Company's fixed rate subordinated debt is based upon the terms of the SunTrust Settlement. On October 21, 2011, the Bank completed the SunTrust Settlement, settling the $2.5 million of its subordinated debt held by SunTrust Bank for $875,000 in cash.

Junior subordinated debentures. Included in junior subordinated debentures are variable rate trust preferred securities issued by the Company. Fair values for the trust preferred securities were estimated by developing cash flow estimates for each of these debt instruments based on scheduled principal and interest payments and current interest rates. Once the cash flows were determined, a market rate for comparable subordinated debt was used to discount the cash flows to the present value. The estimated fair value (discount)/premium totaled $(18.5) million. The estimated fair value for the Company's junior subordinated debentures is significantly lower than carrying value since credit spreads (i.e., spread to LIBOR) on similar trust preferred issues are currently much wider than when these securities were originally issued.

Financial instruments with off-balance sheet risk. The fair value of financial instruments with off-balance sheet risk is considered to approximate carrying value, since the large majority of these future financing commitments would result in loans that have variable rates and/or relatively short terms to maturity. For other commitments, generally of a short-term nature, the carrying value is considered to be a reasonable estimate of fair value.

The estimated fair values of financial instruments for continuing operations are as follows:

(dollars in thousands)	As of September 30, 2011				As of December 31, 2010
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial Assets of Continuing Operations
Cash and cash equivalents	$	364,011	$	364,011	$	160,594	$	160,594
Investment securities: Available-for-sale		199,271		199,271		305,331		305,331
Loans held for sale		25,661		25,661		—		—
Loans, net		846,767		839,005		1,210,288		1,160,163
Accrued interest receivable		3,232		3,232		5,747		5,747
Bank-owned life insurance		32,785		32,785		31,968		31,968
Interest rate swaps		810		810		1,415		1,415
Financial Liabilities of Continuing Operations
Deposits	$	1,565,636	$	1,544,349	$	1,696,390	$	1,682,704
Retail repurchase agreements		6,891		6,891		9,628		9,628
Federal Home Loan Bank advances		118,864		124,155		144,485		150,466
Subordinated debt		2,500		875		7,500		7,500
Junior subordinated debentures		56,702		36,518		56,702		41,681
Accrued interest payable		2,952		2,952		2,592		2,592

The estimated fair values of financial instruments for discontinued operations are as follows:

(dollars in thousands)	As of September 30, 2011				As of December 31, 2010
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial Assets of Discontinued Operations	$	233	$	233	$	37,228	$	37,228
Financial Liabilities of Discontinued Operations		—		—		11		11