Fair Value Measurements

9 Months Ended

Sep. 30, 2013

(a) Fair Value Hierarchy and Fair Value Measurement: The Company groups its assets and liabilities that are recorded at fair value in three levels, based on the markets, if any, in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1: Quoted prices for identical instruments in active markets.

Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3: Significant inputs to the valuation model are unobservable.

The following table presents the Company’s financial instruments measured at fair value on a recurring basis at September 30, 2013 and December 31, 2012:



(dollars in thousands)	Fair Value at September 30, 2013
	Level 1		Level 2		Level 3		Total
U.S. government agencies	$	—	$	85,915	$	—	$	85,915
Residential pass-through securities	—		168,819		—		168,819
Taxable state and political subdivisions	—		2,510		—		2,510
Tax exempt state and political subdivisions	—		72,399		—		72,399
Corporate obligations	5,798		4,950		—		10,748
Agency-issued collateralized mortgage obligations	—		35,738		—		35,738
Asset-backed securities	—		22,234		—		22,234
Investments in mutual funds and other equities	1,913		—		—		1,913
Total	$	7,711	$	392,565	$	—	$	400,276



(dollars in thousands)	Fair Value at December 31, 2012
	Level 1		Level 2		Level 3		Total
U.S. government agencies	$	—	$	88,586	$	—	$	88,586
Residential pass-through securities	—		168,423		—		168,423
Taxable state and political subdivisions	—		5,312		—		5,312
Tax exempt state and political subdivisions	—		58,985		—		58,985
Corporate obligations	2,985		7,450		—		10,435
Agency-issued collateralized mortgage obligations	—		14,046		—		14,046
Asset-backed securities	—		25,188		—		25,188
Investments in mutual funds and other equities	1,993		—		—		1,993
Total	$	4,978	$	367,990	$	—	$	372,968

There were no transfers between Level 1, Level 2 and Level 3 during the three and nine months ended September 30, 2013 or during the year ended December 31, 2012.

When available, the Company uses quoted market prices to determine the fair value of investment securities. These investments are included in Level 1. When quoted market prices are unobservable, the Company uses quotes from independent pricing vendors based on recent trading activity and other relevant information including market interest rate curves, referenced credit spreads and estimated prepayment rates where applicable. These investments are included in Level 2 and comprise the Company’s portfolio of U.S. agency securities, U.S. treasury securities, residential pass-through securities, municipal bonds and other corporate bonds.

Certain financial assets of the Company may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following table presents the carrying value of financial instruments by level within the fair value hierarchy, for which a non-recurring change in fair value has been recorded:



(dollars in thousands)	Fair Value at September 30, 2013
	Level 1		Level 2		Level 3		Total		Total losses for the period
Non-covered impaired loans ⁽¹⁾	$	—	$	—	$	30,625	$	30,625	$	(4,407	)
Non-covered other real estate owned ⁽²⁾	—		—		4,747		4,747		(542		)
Covered other real estate owned ⁽²⁾	—		—		4,109		4,109		(1,386		)
Total	$	—	$	—	$	39,481	$	39,481	$	(6,335	)



(dollars in thousands)	Fair Value at December 31, 2012
	Level 1		Level 2		Level 3		Total		Total losses for the period
Non-covered impaired loans ⁽¹⁾	$	—	$	—	$	38,299	$	38,299	$	(8,485	)
Non-covered other real estate owned ⁽²⁾	—		—		3,023		3,023		(844		)
Covered other real estate owned ⁽²⁾	—		—		13,460		13,460		(3,704		)
Total	$	—	$	—	$	54,782	$	54,782	$	(13,033	)

⁽¹⁾ Represents carrying value and related specific valuation allowances, which are included in the allowance for loan losses.

⁽²⁾ Represents the fair value and related losses of foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as non-covered other real estate owned and covered other real estate owned.

Following is a description of methods and assumptions used to estimate the fair value of each class of financial instrument for which a non-recurring change in fair value has been recorded:

Non-covered impaired loans: A loan is considered impaired when, based upon currently known information, it is deemed probable that the Company will be unable to collect all amounts due as scheduled according to the original terms of the agreement. Non-covered impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, based on the loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent.

The Company generally obtains appraisals for collateral dependent loans on an annual basis. Depending on the loan, the Company may obtain appraisals more frequently than 12 months, particularly if the credit is deteriorating. If the loan is performing and market conditions are stable, the Company may not obtain appraisals on an annual basis. This policy does not vary by loan type.

Impaired loans that are collateral dependent are reviewed quarterly. The review involves a collateral valuation review, which also contemplates an assessment of whether the last appraisal is outdated. Recent appraisals, adjustments to outdated appraisals, knowledgeable third party opinions of value and current market conditions are combined to determine whether a specific reserve and/or a loan charge-off is required. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. For the period ended September 30, 2013, one non-covered impaired loan totaling $105 thousand had an adjustment to the appraisal, based on unobservable inputs, of 30%.

In the rare case where an appraisal is not available, the Company consults with third party industry specific experts for estimates as well as relies upon the Company’s market knowledge and expertise.

Non-covered and covered other real estate owned: Non-covered and covered other real estate owned includes properties acquired through foreclosure. These properties are recorded at the lower of cost or estimated fair value, less estimated cost to sell, based on periodic evaluations.

The Company deducts 10% of the appraised value for selling costs on non-covered and covered other real estate owned. If the property has been actively listed for sale for more than nine months and has had limited interest, the Company will typically reduce the fair value further based upon input from third party industry experts and knowledgeable management and may include adjustments for outdated appraisals (Level 3).

(b) Disclosures about Fair Value of Financial Instruments: The table below is a summary of fair value estimates for financial instruments at September 30, 2013 and December 31, 2012, excluding financial instruments recorded at fair value on a recurring and nonrecurring basis (summarized in the table above). The carrying amounts in the following table are recorded in the statement of financial condition under the indicated captions. The Company has excluded non-financial assets and non-financial liabilities such as Bank premises and equipment, deferred taxes and other liabilities.



(dollars in thousands)	September 30, 2013
			Fair value measurements using:
	Carrying value		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	36,360	$	36,360	$	36,360	$	—	$	—
Interest-bearing deposits	75,145		75,145		75,145		—		—
Investment securities available for sale	400,276		400,276		7,711		392,565		—
FHLB stock	7,239		7,239		7,239		—		—
Loans held for sale	4,191		4,191		—		4,191		—
Non-covered loans	872,636		869,618		—		—		869,618
Covered loans	171,416		158,381		—		—		158,381
Bank owned life insurance	17,817		17,817		17,817		—		—
FDIC indemnification asset	25,439		34,564		—		—		34,564
Financial liabilities:
Deposits	1,429,279		1,434,047		1,048,262		385,785		—
Junior subordinated debentures	25,774		17,774		—		—		17,774



(dollars in thousands)	December 31, 2012
			Fair value measurements using:
	Carrying value		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	32,145	$	32,145	$	32,145	$	—	$	—
Interest-bearing deposits	75,428		75,428		75,428		—		—
Investment securities available for sale	372,968		372,968		4,978		367,990		—
FHLB stock	7,441		7,441		7,441		—		—
Loans held for sale	18,043		18,043		—		18,043		—
Non-covered loans	853,134		858,660		—		—		858,660
Covered loans	217,339		234,396		—		—		234,396
Bank owned life insurance	17,704		17,704		17,704		—		—
FDIC indemnification asset	34,571		22,630		—		—		22,630
Financial liabilities:
Deposits	1,462,973		1,468,189		1,015,075		453,114		—
Junior subordinated debentures	25,774		12,155		—		—		12,155

Following is a description of methods and assumptions used to estimate the fair value of each class of financial instrument not recorded at fair value but required for disclosure purposes:

Cash and Cash Equivalents: The carrying value of cash and cash equivalent instruments approximates fair value.

Interest-bearing Deposits: The carrying values of interest-bearing deposits maturing within ninety days approximate their fair values. Fair values of other interest-earning deposits are estimated using discounted cash flow analysis based on current rates for similar types of deposits.

Investment Securities: Fair values of investment securities are based on quoted market prices when available or through the use of alternative approaches, such as matrix or model pricing, or broker indicative bids, when market quotes are not readily accessible or available.

FHLB stock: The Bank’s investment in FHLB stock is carried at par value, which approximates its fair value.

Loans Held for Sale: The carrying value of loans held for sale approximates fair value.

Non-covered Loans: The loan portfolio is composed of commercial, consumer, real estate construction and real estate loans. The carrying value of variable rate loans approximates their fair value. The fair value of fixed rate loans is estimated by discounting the estimated future cash flows of loans, sorted by type and security, by the weighted average rate of such loans and rising rates currently offered by the Bank for similar loans.

Covered Loans: Covered loans are measured at estimated fair value on the date of acquisition. Subsequent to acquisition, the fair value of covered loans is measured using the same methodology as that of non-covered loans.

Bank Owned Life Insurance: Fair values of insurance policies owned are based on the insurance contract’s cash surrender value.

FDIC Indemnification Asset: The FDIC indemnification asset is calculated as the expected future cash flows under the loss share agreement discounted by a rate reflective of a U.S. government agency security.

Deposits: For deposits with no contractual maturity such as checking accounts, money market accounts and savings accounts, fair values approximate book values. The fair value of certificates of deposit are based on discounted cash flows using the difference between the actual deposit rate and an alternative cost of funds rate, currently offered by the Bank for similar types of deposits.

Trust Preferred Securities/Junior Subordinated Debentures: The fair value of trust preferred securities is estimated using discounted cash flow analysis based on current rates for similar types of debt.

Off-Balance Sheet Items: Commitments to extend credit represent the principal category of off-balance sheet financial instruments. The fair value of these commitments are not material since they are for relatively short periods of time and are subject to customary credit terms, which would not include terms that would expose the Company to significant gains or losses.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

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