Assets and Liabilities Measured at Fair Value

3 Months Ended

Mar. 31, 2013

Fair Value [Abstract]

Assets and Liabilities Measured at Fair Value

Note 12 – Assets and Liabilities Measured at Fair Value

Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, the Financial Accounting Standards Board’s Accounting Standards Codification Topic 820 (“ASC 820”) Fair Value Measurements and Disclosures establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Fair Value Hierarchy

Level 1 Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that United has the ability to access.

Level 2 Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.

Level 3 Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. United’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following is a description of the valuation methodologies used for assets and liabilities recorded at fair value.

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 include asset-backed securities in less liquid markets.

Deferred Compensation Plan Assets and Liabilities

Included in other assets in the Consolidated Balance Sheet are assets related to employee deferred compensation plans. The assets associated with these plans are invested in mutual funds and classified as Level 1. Deferred compensation liabilities, also classified as Level 1, are carried at the fair value of the obligation to the employee, which mirrors the fair value of the invested assets and is included in other liabilities in the consolidated balance sheet.

Mortgage Loans Held for Sale

Mortgage loans held for sale are carried at the lower of cost or market value. The fair value of mortgage loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics.  Generally, book value approximates fair value.

Loans

United does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses 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 individually impaired, management measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price, or the fair value of the collateral if repayment of the loan is dependent upon the sale of the underlying collateral.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with ASC 820, 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, United records the impaired loan as nonrecurring Level 2. 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, United records the impaired loan as nonrecurring Level 3.

Foreclosed Assets

Foreclosed assets are adjusted to fair value, less cost to sell, upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are 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. When the fair value of the collateral is based on an observable market price or a current appraised value, United records the foreclosed asset as nonrecurring Level 2. 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, United records the foreclosed asset as nonrecurring Level 3.

Goodwill and Other Intangible Assets

Goodwill and identified intangible assets are subject to impairment testing. United’s approach to testing goodwill for impairment is to compare the business unit’s carrying value to the implied fair value based on multiples of earnings and tangible book value for recently completed merger transactions.  In the event the fair value is determined to be less than the carrying value, the asset is recorded at fair value as determined by the valuation model. As such, United classifies goodwill and other intangible assets subjected to nonrecurring fair value adjustments as Level 3.

Derivative Financial Instruments

United uses interest rate swaps and interest rate floors to manage its interest rate risk.  The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.  The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments.  The variable cash payments are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

The fair values of interest rate options are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fell below the strike rate of the floors.  The variable interest rates used in the calculation of projected receipts on the floor are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.  To comply with the provisions of ASC 820, United incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, United has considered the effect of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although United has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties.  However, as of March 31, 2013, United had assessed the significance of the effect 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.  As a result, United has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The table below presents United’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2013, December 31, 2012 and March 31, 2012, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).

March 31, 2013	Level 1		Level 2		Level 3		Total
Assets:
Securities available for sale:
State and political subdivisions	$	—		24,037	$	—	$	24,037
Mortgage-backed securities		—		1,468,311		—		1,468,311
Corporate bonds		—		188,444		350		188,794
Asset-backed securities		—		225,870				225,870
Other		—		2,414		—		2,414
Deferred compensation plan assets		3,037		—		—		3,037
Derivative financial instruments		—		602		—		602
Total assets	$	3,037	$	1,909,678	$	350	$	1,913,065
Liabilities:
Deferred compensation plan liability	$	3,037	$	—	$	—	$	3,037
Brokered certificates of deposit		—		194,415		—		194,415
Derivative financial instruments		—		14,556		—		14,556
Total liabilities	$	3,037	$	208,971	$	—	$	212,008

December 31, 2012	Level 1		Level 2		Level 3		Total
Assets:
Securities available for sale
State and political subdivisions	$	—	$	29,052	$	—	$	29,052
Mortgage-backed securities		—		1,428,502		—		1,428,502
Corporate bonds		—		163,312		350		163,662
Asset-backed securities		—		210,556		—		210,556
Other		—		2,821		—		2,821
Deferred compensation plan assets		3,101		—		—		3,101
Derivative financial instruments		—		658		—		658
Total assets	$	3,101	$	1,834,901	$	350	$	1,838,352
Liabilities:
Deferred compensation plan liability	$	3,101	$	—	$	—	$	3,101
Brokered certificates of deposit		—		154,641		—		154,641
Derivative financial instruments		—		12,543		—		12,543
Total liabilities	$	3,101	$	167,184	$	—	$	170,285

March 31, 2012	Level 1		Level 2		Level 3		Total
Assets:
Securities available for sale:
U.S. Government agencies	$	—	$	43,789	$	—	$	43,789
State and political subdivisions		—		22,808		—		22,808
Mortgage-backed securities		—		1,725,068		—		1,725,068
Corporate bonds		—		104,236		350		104,586
Other		—		2,564		—		2,564
Deferred compensation plan assets		2,973		—		—		2,973
Derivative financial instruments		—		73		—		73
Total assets	$	2,973	$	1,898,538	$	350	$	1,901,861
Liabilities:
Deferred compensation plan liability	$	2,973	$	—	$	—	$	2,973
Brokered certificates of deposit		—		61,069		—		61,069
Derivative financial instruments		—		2,599		—		2,599
Total liabilities	$	2,973	$	63,668	$	—	$	66,641

The following table shows a reconciliation of the beginning and ending balances for assets measured at fair value on a recurring basis using significant unobservable inputs that are classified as Level 3 values (in thousands).

	Three Months Ended
	March 31,
Securities Available for Sale	2013		2012
Balance at beginning of period	$	350	$	350
Amounts included in earnings		—		—
Paydowns		—		—
Balance at end of period	$	350	$	350

United has two securities that have Level 3 valuations.  They are trust preferred securities in community banks that have shown deteriorating financial condition during the financial crisis, and both are currently deferring interest payments.  Since both investments are not actively traded, there is no recent trade activity upon which to assess value.  The values assigned to the investments are based on sales price estimates from brokers.  Both investments have a par amount of $1 million.  One was considered impaired in 2010 and was written down to $50,000 with a $950,000 impairment charge to earnings.  The other is carried at its original cost basis of $1 million with a $700,000 negative mark to fair value through other comprehensive income.  United does not consider this investment to be other than temporarily impaired, as the community bank was recapitalized by a private equity investment that management believes will result in full payment at maturity.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

United may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis.  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.  The table below presents United’s assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2013, December 31, 2012 and March 31, 2012, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).

March 31, 2013	Level 1		Level 2		Level 3		Total
Assets
Loans	$	—	$	—	$	170,767	$	170,767
Foreclosed properties		—		—		14,716		14,716
Total	$	—	$	—	$	185,483	$	185,483

December 31, 2012
Assets
Loans	$	—	$	—	$	165,751	$	165,751
Foreclosed properties		—		—		14,788		14,788
Total	$	—	$	—	$	180,539	$	180,539

March 31, 2012
Assets
Loans	$	—	$	—	$	176,632	$	176,632
Foreclosed properties		—		—		27,675		27,675
Total	$	—	$	—	$	204,307	$	204,307

Loans that are reported above as being measured at fair value on a non-recurring basis are generally impaired loans that have either been partially charged off or have specific reserves assigned to them.  Nonaccrual impaired loans that are collateral dependent are generally written down to 80% of appraised value which considers the estimated costs to sell.  Specific reserves are established for impaired loans based on appraised value of collateral or discounted cash flows.  Foreclosed properties that are included above as measured at fair value on a nonrecurring basis are those properties that resulted from a loan that had been charged down or have been written down subsequent to foreclosure.  Foreclosed properties are generally recorded at the lower of 80% of appraised value or 90% of the asking price which considers the estimated cost to sell.

Assets and Liabilities Not Measured at Fair Value

For financial instruments that have quoted market prices, those quotes are used to determine fair value.  Financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate, are assumed to have a fair value that approximates the reported book value, after taking into consideration any applicable credit risk.  If no market quotes are available, financial instruments are valued by discounting the expected cash flows using an estimated current market interest rate for the financial instrument.  For off-balance sheet derivative instruments, fair value is estimated as the amount that United would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts.

The short maturity of United’s assets and liabilities results in having a significant number of financial instruments whose fair value equals or closely approximates carrying value.  Such financial instruments are reported in the following balance sheet captions: cash and cash equivalents, mortgage loans held for sale and short-term borrowings.  The fair value of securities available-for-sale equals the balance sheet value.  Due to the short-term settlement of accrued interest receivable and payable, the carrying amount closely approximates fair value.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.  These estimates do not reflect the premium or discount on any particular financial instrument that could result from the sale of United’s entire holdings.  Because no ready market exists for a significant portion of United’s financial instruments, fair value estimates are based on many judgments.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  Significant assets and liabilities that are not considered financial instruments include the mortgage banking operation, brokerage network, deferred income taxes, premises and equipment and goodwill.  In addition, the tax ramifications related to the realization of the unrealized gains and losses can have significant effect on fair value estimates and have not been considered in the estimates.

Off-balance sheet instruments (commitments to extend credit and standby letters of credit) are generally short-term and at variable rates.  Therefore, both the carrying amount and the estimated fair value associated with these instruments are immaterial.

The carrying amount and fair values for other financial instruments that are not measured at fair value on a recurring basis in United’s balance sheet at March 31, 2013, December 31, 2012, and March 31, 2012 are as follows (in thousands).

	Carrying		Fair Value Level
March 31, 2013	Amount		Level 1		Level 2		Level 3		Total
Assets:
Securities held to maturity	$	231,087	$	—	$	247,087	$	—	$	247,087
Loans, net		4,087,807		—		—		3,980,932		3,980,932
Mortgage loans held for sale		18,290		—		18,803		—		—
Liabilities:
Deposits		6,025,852		—		6,034,103		—		6,034,103
Federal Home Loan Bank advances		125		—		125		—		125
Long-term debt		124,825		—		—		123,402		123,402

December 31, 2012
Assets:
Securities held to maturity	$	244,184	$	—	$	261,131	$	—	$	261,131
Loans, net		4,067,871		—		—		3,957,669		3,957,669
Mortgage loans held for sale		28,821		—		29,693		—		—
Liabilities:
Deposits		5,952,140		—		5,988,743		—		5,988,743
Federal Home Loan Bank advances		40,125		—		40,125		—		40,125
Long-term debt		124,805		—		—		118,626		118,626

March 31, 2012
Assets:
Securities held to maturity	$	303,636	$	—	$	318,490	$	—	$	318,490
Loans, net		4,013,965		—		—		3,825,482		3,825,482
Mortgage loans held for sale		24,809		—		25,288		—		—
Liabilities:
Deposits		6,000,539		—		5,986,925		—		5,986,925
Federal Home Loan Bank advances		215,125		—		217,033		—		217,033
Long-term debt		120,245		—		—		113,891		113,891