Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.4.0.6
Fair Value Measurements
3 Months Ended
Mar. 31, 2012
Fair Value Measurements [Abstract]  
Fair Value Measurements
12. 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 section 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.

Interest rate swap agreement used for interest rate risk management

Interest rate swaps are recorded at fair value on a recurring basis. The Company utilizes an interest rate swap agreement 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 interest rate swaps using standard swap valuation techniques and therefore classifies such valuations as Level 2. Third party valuations are validated by the Company using Bloomberg's derivative pricing functions. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets and has considered its own credit risk in the valuation of its interest rate swap 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 modes, 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 thousands of 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 March 31, 2012 and December 31, 2011.

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 March 31, 2012 and December 31, 2011 (dollars in thousands):

 

     Fair Value Measurements at March 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

   $ —         $ 44       $ —         $ 44   

Securities available for sale:

           

U.S. government and agency securities

     —           3,754         —           3,754   

Obligations of states and political subdivisions

     —           201,260         —           201,260   

Corporate and other bonds

     —           11,908         —           11,908   

Mortgage-backed securities

     —           401,654         —           401,654   

Other securities

     —           3,175         —           3,175   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 621,795       $ —         $ 621,795   
  

 

 

    

 

 

    

 

 

    

 

 

 

LIABILITIES

           

Interest rate swap - loans

   $ —         $ 44       $ —         $ 44   

Cash flow hedge - trust

     —           4,096         —           4,096   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 4,140       $ —         $ 4,140   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurements at December 31, 2011 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

   $ —         $ 66       $ —         $ 66   

Securities available for sale:

           

U.S. government and agency securities

     —           4,284         —           4,284   

Obligations of states and political subdivisions

     —           200,207         —           200,207   

Corporate and other bonds

     —           12,240         —           12,240   

Mortgage-backed securities

     —           400,318         —           400,318   

Other securities

     —           3,117         —           3,117   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 620,232       $ —         $ 620,232   
  

 

 

    

 

 

    

 

 

    

 

 

 

LIABILITIES

           

Interest rate swap - loans

   $ —         $ 66       $ —         $ 66   

Cash flow hedge - trust

     —           4,293         —           4,293   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 4,359       $ —         $ 4,359   
  

 

 

    

 

 

    

 

 

    

 

 

 

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. No nonrecurring fair value adjustments were recorded on loans held for sale during March 31, 2012 and December 31, 2011. 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 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 (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than two years old, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal 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). 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

Fair values of other real estate owned are carried at the lower of 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 the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as Level 2 valuation. 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 March 31, 2012 and December 31, 2011 were $0 and $707,000, respectively.

The following table summarizes the Company's financial assets that were measured at fair value on a nonrecurring basis at March 31, 2012 and December 31, 2011 (dollars in thousands):

 

     Fair Value Measurements at March 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

   $ —         $ 73,575       $ —         $ 73,575   

Impaired loans

     —           33,254         14,652         47,906   

Other real estate owned

     —           —           37,663         37,663   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 106,829       $ 52,315       $ 159,144   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurements at December 31, 2011 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

   $ —         $ 74,823       $ —         $ 74,823   

Impaired loans

     —           28,525         34,898         63,423   

Other real estate owned

     —           —           32,263         32,263   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 103,348       $ 67,161       $ 170,509   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

The changes in Level 3 assets measured at estimated fair value on a nonrecurring basis during the year ended March 31, 2012 were as follows:

 

     Fair Value Measurements at March 31, 2012  
     Impaired Loans     Other Real Estate Owned  

Balance - January 1, 2012

   $ 34,898      $ 32,263   

Total gains (losses) realized/unrealized:

    

Included in earnings

     —          (27

Additions

     13,890        6,912   

Sales

     —          (1,485

Net Payments

     (25,603     —     

Transfers from Level 2

     —          —     

Transfers to Level 2

     (8,533     —     
  

 

 

   

 

 

 

Balance - March 31, 2012

   $ 14,652      $ 37,663   
  

 

 

   

 

 

 

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

 

    Fair Value Measurements at March 31, 2012  
    Fair Value    

Valuation Technique(s)

 

Unobservable Inputs

  Weighted Average  

ASSETS

       

Commercial Construction

  $ 3,609     

Market comparables

 

Discount applied to market comparables (1)

    30

Commercial Real Estate - Owner Occupied

    1,277     

Market comparables

 

Discount applied to market comparables (1)

    28

Raw Land and Lots

    6,991     

Market comparables

 

Discount applied to market comparables (1)

    39

Commercial and Industrial

    1,302     

Market comparables

 

Discount applied to market comparables (1)

    38

Other (2)

    1,473     

Market comparables

 

Discount applied to market comparables (1)

    26
 

 

 

       

Total Impaired Loans

    14,652         

Other real estate owned

    37,663     

Market comparables

 

Discount applied to market comparables (1)

    31
 

 

 

       

Total

  $ 52,315         
 

 

 

       

 

(1) 

A discount percentage 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 Single Family Investment Real Estate, Mortgage, and Consumer Construction.

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.(Level 2). 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 deposits is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities (Level 2).

 

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 (Level 2). 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 (Level 2).

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 March 31, 2012 and December 31, 2011, 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 March 31, 2012 and December 31, 2011 are as follows (dollars in thousands):

 

            Fair Value Measurements at March 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

   $ 111,183       $ 111,183       $ —         $ —         $ 111,183   

Securities available for sale

     621,751         —           621,751         —           621,751   

Restricted stock

     20,715         —           20,715         —           20,715   

Loans held for sale

     73,575         —           73,575         —           73,575   

Net loans

     2,801,554         —           2,803,515         14,652         2,818,167   

Interest rate swap - loans

     44         —           44         —           44   

Accrued interest receivable

     16,275         —           16,275         —           16,275   

LIABILITIES

              

Deposits

   $ 3,215,707       $ —         $ 3,230,517       $ —         $ 3,230,517   

Borrowings

     268,856         —           268,821         —           268,821   

Accrued interest payable

     999         —           999         —           999   

Cash flow hedge - trust

     4,096         —           4,096         —           4,096   

Interest rate swap - loans

     44         —           44         —           44   

 

            Fair Value Measurements at December 31, 2011 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

   $ 96,659       $ 96,659       $ —         $ —         $ 96,659   

Securities available for sale

     620,166         —           620,166         —           620,166   

Restricted stock

     20,661         —           20,661         —           20,661   

Loans held for sale

     74,823         —           74,823         —           74,823   

Net loans

     2,779,113         —           2,760,016         34,898         2,794,914   

Interest rate swap - loans

     66         —           66         —           66   

Accrued interest receivable

     16,626         —           16,626         —           16,626   

LIABILITIES

              

Deposits

   $ 3,175,105       $ —         $ 3,191,256       $ —         $ 3,191,256   

Borrowings

     278,686         —           277,374         —           277,374   

Accrued interest payable

     1,865         —           1,865         —           1,865   

Cash flow hedge - trust

     4,293         —           4,293         —           4,293   

Interest rate swap - loans

     66         —           66         —           66   

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.