Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE MEASUREMENTS

v2.4.0.8
FAIR VALUE MEASUREMENTS
9 Months Ended
Sep. 30, 2013
FAIR VALUE MEASUREMENTS [Abstract]  
FAIR VALUE MEASUREMENTS

9.FAIR VALUE MEASUREMENTS

 

The Company follows ASC 820, Fair Value Measurements and Disclosures, (“ASC 820”) to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  This codification clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants.

 

ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions.  The three levels of the fair value hierarchy under ASC 820 based on these two types of inputs are as follows:

 

 

Level 1 

 

Valuation is based on quoted prices in active markets for identical assets and liabilities.

 

 

 

 

 

Level 2

 

Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the markets.

 

 

 

 

 

Level 3 

 

Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market. These unobservable inputs reflect the Company’s assumptions about what market participants would use and information that is reasonably available under the circumstances without undue cost and effort.

 

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements.

 

Derivative instruments 

As discussed in Note 7 “Derivatives,” the Company records derivative instruments at fair value on a recurring basis.  The Company utilizes derivative instruments as part of the management of interest rate risk to modify the repricing characteristics of certain portions of the Company’s interest-bearing assets and liabilities.  The Company has contracted with a third party vendor to provide valuations for derivatives using standard valuation techniques and therefore classifies such valuations as Level 2.  Third party valuations are validated by the Company using Bloomberg Valuation Service’s derivative pricing functions.  The Company has considered counterparty credit risk in the valuation of its derivative assets and has considered its own credit risk in the valuation of its derivative liabilities.

Securities available for sale

Securities available for sale are recorded at fair value on a recurring basis.  Fair value measurement is based upon quoted market prices, when available (Level 1).  If 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 market data (Level 2).  If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity then the security would fall to the lowest level of the hierarchy (Level 3).

The Company’s investment portfolio is primarily valued using fair value measurements that are considered to be Level 2.  The Company has contracted with a third party portfolio accounting service vendor for valuation of its securities portfolio.  The vendor’s primary source for security valuation is Interactive Data Corporation (“IDC”), which evaluates securities based on market data.  IDC utilizes evaluated pricing models that vary by asset class and include available trade, bid, and other market information.  Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

The vendor utilizes proprietary valuation matrices for valuing all municipals securities.  The initial curves for determining the price, movement, and yield relationships within the municipal matrices are derived from industry benchmark curves or sourced from a municipal trading desk.  The securities are further broken down according to issuer, credit support, state of issuance, and rating to incorporate additional spreads to the industry benchmark curves.

The Company uses Bloomberg Valuation Service, an independent information source that draws on quantitative models and market data contributed from over 4,000 market participants, to validate third party valuations.  Any material differences between valuation sources are researched by further analyzing the various inputs that are utilized by each pricing source.  No material differences were identified during our validation as of September 30, 2013 and December 31, 2012. 

 

The carrying value of restricted Federal Reserve Bank of Richmond and FHLB stock approximates fair value based on the redemption provisions of each entity and is therefore excluded from the following table.

 

 

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis at September 30, 2013 and December 31, 2012 (dollars in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at September 30, 2013 using

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in Active Markets for Identical Assets

 

Significant Other Observable Inputs

 

Significant Unobservable Inputs

 

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap - loans

$

 -

 

$

21 

 

$

 -

 

$

21 

Cash flow hedge - prime loan swap

 

 -

 

 

672 

 

 

 -

 

 

672 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

 -

 

 

2,631 

 

 

 -

 

 

2,631 

Obligations of states and political subdivisions

 

 -

 

 

237,241 

 

 

 -

 

 

237,241 

Corporate and other bonds

 

 -

 

 

5,544 

 

 

 -

 

 

5,544 

Mortgage-backed securities

 

 -

 

 

340,425 

 

 

 -

 

 

340,425 

Other securities

 

 -

 

 

3,596 

 

 

 -

 

 

3,596 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap - loans

$

 -

 

$

21 

 

$

 -

 

$

21 

Cash flow hedge - trust preferred

 

 -

 

 

3,336 

 

 

 -

 

 

3,336 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2012 using

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in Active Markets for Identical Assets

 

Significant Other Observable Inputs

 

Significant Unobservable Inputs

 

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap - loans

$

 -

 

$

18 

 

$

 -

 

$

18 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

 -

 

 

2,849 

 

 

 -

 

 

2,849 

Obligations of states and political subdivisions

 

 -

 

 

229,778 

 

 

 -

 

 

229,778 

Corporate and other bonds

 

 -

 

 

7,212 

 

 

 -

 

 

7,212 

Mortgage-backed securities

 

 -

 

 

342,174 

 

 

 -

 

 

342,174 

Other securities

 

 -

 

 

3,369 

 

 

 -

 

 

3,369 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap - loans

$

 -

 

$

18 

 

$

 -

 

$

18 

Cash flow hedge - trust preferred

 

 -

 

 

4,489 

 

 

 -

 

 

4,489 

 

 

 

 

 

 

 

 

 

 

 

 

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP.  Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements.

Loans held for sale

Loans held for sale are carried at the lower of cost or market value.  These loans currently consist of residential loans originated for sale in the secondary market.  Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2).  As such, the Company records any fair value adjustments on a nonrecurring basis.  Nonrecurring fair value adjustments of $363,000 and $0 were recorded on loans held for sale during the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively.  Gains and losses on the sale of loans are recorded within income from the mortgage segment on the Consolidated Statements of Income. 

 

Impaired loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected.  The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral.  Collateral dependent loans are reported at the fair value of the underlying collateral if repayment is solely from the underlying value of the collateral.  Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate.  The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data.  When evaluating the fair value, management may discount the appraisal further if, based on their understanding of the market conditions, it is determined the collateral is further impaired below the appraised value (Level 3).  The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data.  Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Collateral dependent impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis.  Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

Other real estate owned (“OREO”)

Fair values of OREO are carried at the lower of either carrying value or fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral.  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 foreclosed asset as Level 3 valuation.  Total valuation expenses related to OREO properties for the nine months ended September 30, 2013 and September 30, 2012 were $491,000 and $0, respectively, and for the year ended December 31, 2012 were $301,000. 

 

The following tables summarize the Company’s financial assets that were measured at fair value on a nonrecurring basis at September 30, 2013 and December 31, 2012 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at September 30, 2013 using

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in Active Markets for Identical Assets

 

Significant Other Observable Inputs

 

Significant Unobservable Inputs

 

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

$

 -

 

$

58,179 

 

$

 -

 

$

58,179 

Impaired loans

 

 -

 

 

 -

 

 

13,934 

 

 

13,934 

Other real estate owned

 

 -

 

 

 -

 

 

35,709 

 

 

35,709 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2012 using

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in Active Markets for Identical Assets

 

Significant Other Observable Inputs

 

Significant Unobservable Inputs

 

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

$

 -

 

$

167,698 

 

$

 -

 

$

167,698 

Impaired loans

 

 -

 

 

 -

 

 

30,104 

 

 

30,104 

Other real estate owned

 

 -

 

 

 -

 

 

32,834 

 

 

32,834 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table displays quantitative information about Level 3 Fair Value Measurements for September 30, 2013 (dollars in thousands):

 

 

 

 

 

 

 

 

 

Fair Value Measurements at September 30, 2013

 

Fair Value

Valuation Technique(s)

Unobservable Inputs

Weighted Average

ASSETS

 

 

 

 

 

Commercial Construction

$

102 

Market comparables

Discount applied to market comparables (1)

0% 

Commercial Real Estate - Owner Occupied

 

4,120 

Market comparables

Discount applied to market comparables (1)

36% 

Raw Land and Lots

 

1,750 

Market comparables

Discount applied to market comparables (1)

6% 

Single Family Investment Real Estate

 

1,892 

Market comparables

Discount applied to market comparables (1)

5% 

Commercial and Industrial

 

4,148 

Market comparables

Discount applied to market comparables (1)

48% 

Other (2)

 

1,922 

Market comparables

Discount applied to market comparables (1)

16% 

Total Impaired Loans

 

13,934 

 

 

 

 

 

 

 

 

 

Other real estate owned

 

35,709 

Market comparables

Discount applied to market comparables (1)

32% 

    Total

$

49,643 

 

 

 

 

 

 

 

 

 

(1)  A discount percentage (in addition to expected selling costs) is applied based on age of independent appraisals, current market conditions, and experience within the local market.

(2)    The "Other" category of the impaired loans section from the table above consists of Other Commercial, Mortgage, Consumer Construction, HELOCs, and Other Consumer.

 

 

 

 

 

 

 

The following table displays quantitative information about Level 3 Fair Value Measurements for  December 31, 2012 (dollars in thousands):

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2012

 

Fair Value

Valuation Technique(s)

Unobservable Inputs

Weighted Average

ASSETS

 

 

 

 

 

Commercial Construction

$

3,190 

Market comparables

Discount applied to market comparables (1)

6% 

Commercial Real Estate - Owner Occupied

 

2,001 

Market comparables

Discount applied to market comparables (1)

13% 

Commercial Real Estate - Non-Owner Occupied

 

13,100 

Market comparables

Discount applied to market comparables (1)

9% 

Raw Land and Lots

 

7,300 

Market comparables

Discount applied to market comparables (1)

6% 

Single Family Investment Real Estate

 

1,241 

Market comparables

Discount applied to market comparables (1)

6% 

Commercial and Industrial

 

1,810 

Market comparables

Discount applied to market comparables (1)

23% 

Other (2)

 

1,462 

Market comparables

Discount applied to market comparables (1)

27% 

Total Impaired Loans

 

30,104 

 

 

 

 

 

 

 

 

 

Other real estate owned

 

32,834 

Market comparables

Discount applied to market comparables (1)

33% 

    Total

$

62,938 

 

 

 

 

 

 

 

 

 

(1)    A discount percentage (in addition to expected selling costs) is applied based on age of independent appraisals, current market conditions, and experience within the local market.

(2)  The "Other" category of the impaired loans section from the table above consists of Other Commercial, Mortgage, Consumer Construction, HELOCs, and Other Consumer.

 

 

 

 

 

 

 

ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments for interim periods and excludes certain financial instruments and all non-financial instruments from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

Cash and cash equivalents

For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

Loans

The fair value of performing loans is estimated by discounting expected future cash flows using a yield curve that is constructed by adding a loan spread to a market yield curve.  Loan spreads are based on spreads currently observed in the market for loans of similar type and structure.  Fair value for impaired loans and their respective level within the fair value hierarchy, are described in the previous disclosure related to fair value measurements of assets that are measured on a nonrecurring basis.

Deposits

The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date.  The fair value of certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.

Borrowings

The carrying value of the Company’s repurchase agreements is a reasonable estimate of fair value. Other borrowings are discounted using the current yield curve for the same type of borrowing.  For borrowings with embedded optionality, a third party source is used to value the instrument. The Company validates all third party valuations for borrowings with optionality using Bloomberg’s derivative pricing functions.

Accrued interest

The carrying amounts of accrued interest approximate fair value.

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.  At September 30, 2013 and December 31, 2012, the fair value of loan commitments and standby letters of credit was immaterial.

 

The carrying values and estimated fair values of the Company’s financial instruments as of September 30, 2013 and December 31, 2012 are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at September 30, 2013 using

 

 

 

Quoted Prices in Active Markets for Identical Assets

 

Significant Other Observable Inputs

 

Significant Unobservable Inputs

 

Total Fair Value

 

Carrying Value

 

Level 1

 

Level 2

 

Level 3

 

Balance

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

75,082 

 

$

75,082 

 

$

 -

 

$

 -

 

$

75,082 

Securities available for sale

 

589,437 

 

 

 -

 

 

589,437 

 

 

 -

 

 

589,437 

Restricted stock

 

19,531 

 

 

 -

 

 

19,531 

 

 

 -

 

 

19,531 

Loans held for sale

 

58,179 

 

 

 -

 

 

58,179 

 

 

 -

 

 

58,179 

Net loans

 

2,968,369 

 

 

 -

 

 

 -

 

 

2,986,177 

 

 

2,986,177 

Cash flow hedge - prime loan swap

 

672 

 

 

 -

 

 

672 

 

 

 -

 

 

672 

Interest rate swap - loans

 

21 

 

 

 -

 

 

21 

 

 

 -

 

 

21 

Accrued interest receivable

 

14,221 

 

 

 -

 

 

14,221 

 

 

 -

 

 

14,221 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

$

3,224,925 

 

$

 -

 

$

3,229,448 

 

$

 -

 

$

3,229,448 

Borrowings

 

349,995 

 

 

 -

 

 

330,175 

 

 

 -

 

 

330,175 

Accrued interest payable

 

954 

 

 

 -

 

 

954 

 

 

 -

 

 

954 

Cash flow hedge - trust preferred

 

3,336 

 

 

 -

 

 

3,336 

 

 

 -

 

 

3,336 

Interest rate swap - loans

 

21 

 

 

 -

 

 

21 

 

 

 -

 

 

21 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2012 using

 

 

 

Quoted Prices in Active Markets for Identical Assets

 

Significant Other Observable Inputs

 

Significant Unobservable Inputs

 

Total Fair Value

 

Carrying Value

 

Level 1

 

Level 2

 

Level 3

 

Balance

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

82,902 

 

$

82,902 

 

$

 -

 

$

 -

 

$

82,902 

Securities available for sale

 

585,382 

 

 

 -

 

 

585,382 

 

 

 -

 

 

585,382 

Restricted stock

 

20,687 

 

 

 -

 

 

20,687 

 

 

 -

 

 

20,687 

Loans held for sale

 

167,698 

 

 

 -

 

 

167,698 

 

 

 -

 

 

167,698 

Net loans

 

2,931,931 

 

 

 -

 

 

 -

 

 

2,956,339 

 

 

2,956,339 

Interest rate swap - loans

 

18 

 

 

 -

 

 

18 

 

 

 -

 

 

18 

Accrued interest receivable

 

19,663 

 

 

 -

 

 

19,663 

 

 

 -

 

 

19,663 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

$

3,297,767 

 

$

 -

 

$

3,309,149 

 

$

 -

 

$

3,309,149 

Borrowings

 

329,395 

 

 

 -

 

 

309,019 

 

 

 -

 

 

309,019 

Accrued interest payable

 

1,414 

 

 

 -

 

 

1,414 

 

 

 -

 

 

1,414 

Cash flow hedge – trust preferred

 

4,489 

 

 

 -

 

 

4,489 

 

 

 -

 

 

4,489 

Interest rate swap - loans

 

18 

 

 

 -

 

 

18 

 

 

 -

 

 

18 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations.  As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk.  However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment.  Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment.  Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.