FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS | 6 Months Ended |
Jun. 30, 2014 |
Fair Value Disclosures [Abstract] | ' |
FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS | ' |
FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS |
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In general, fair value 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 market participants, which is not adjusted for transaction costs. Accounting guidelines establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted, quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below: |
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Basis of Fair Value Measurement: |
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Level 1 - Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
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Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and |
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Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity). |
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A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. |
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The types of instruments whose value is based on quoted market prices in active markets include most U.S. Treasury securities, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy. The Company does not adjust the quoted price for such instruments. |
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The types of instruments whose value is based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most U.S. Government agency securities, state and municipal bonds, mortgage-backed securities, collateralized mortgage obligations, and corporate securities. Such instruments are generally classified within Level 2 of the fair value hierarchy and their fair values are determined as follows: |
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• | The markets for U.S. Government agency securities are active, but the exact (cusip) securities owned by the Company are traded thinly or infrequently. Therefore, the price for these securities is determined by reference to transactions in securities with similar yields, maturities and other features (matrix priced). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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• | State and municipal bonds owned by the Company are traded thinly or infrequently, and as a result the fair value is estimated in reference to securities with similar yields, credit ratings, maturities, and in consideration of any prepayment assumptions obtained from market data. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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• | Collateralized mortgage obligations and mortgage-backed securities are generally unique securities whose fair value is estimated using market information for new issues and adjusting for the features of a particular security by applying assumptions for prepayments, pricing spreads, yields and credit ratings. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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• | Certain corporate securities owned by the Company are traded thinly or infrequently. Therefore, the fair value of these securities is determined by reference to transactions in other issues of these securities with similar yields and features. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Level 3 classification is for positions that are not traded in active markets or are subject to transfer restrictions. Valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula along with indicative exit pricing obtained from broker/dealers are used to fair value Level 3 investments. Management changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows. Fair values for securities classified within Level 3 are determined as follows: |
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• | Certain corporate securities owned by the Company are not traded in active markets and prices for securities with similar features are unavailable. The fair value for each security is estimated in reference to benchmark transactions by security type based upon yields, credit spreads and option features. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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• | Certain marketable equity securities which are not subject to ownership restrictions but are traded thinly on exchanges or over-the-counter. As a result, prices are not available on a consistent basis from published sources, and, therefore, additional quotations from brokers may be obtained. Additionally considered indications of pricing include subsequent financing rounds or pending transactions. The reported fair value is based upon the Company’s judgment with respect to the information it is able to reliably obtain. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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The Company utilizes a third-party service provider to assist with investment security pricing. Each quarter the Company performs an independent validation of the third-party security pricing by obtaining pricing from other sources and evaluating discrepancies to established tolerances for each security type, including a review of unchanged prices. Additionally, the Company evaluates the third-party service provider's pricing results by periodically reviewing the service provider's practices and procedures. |
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Interest rate swap agreements are measured by alternative pricing sources with reasonable levels of price transparency in markets that are not active. Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of the Level 1 markets. These markets do however have comparable, observable inputs in which an alternative pricing source values these assets to arrive at a fair value. These characteristics classify interest rate swap agreements as Level 2 measurements. |
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The Company has the option to measure eligible financial assets, financial liabilities and Company commitments at fair value (i.e. the fair value option), on an instrument-by-instrument basis. The election to use the fair value option is available when an entity first recognizes a financial asset or liability or upon entering into a Company commitment. Subsequent changes in fair value must be recorded in earnings. The Company has not elected to apply the fair value option to any of its financial instruments at June 30, 2014. |
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The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2014 and December 31, 2013, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. |
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30-Jun-14 | Total | | Quoted Prices | | Significant | | Significant Unobservable Inputs | | | | | | | | | | | | | | | | | | | | |
Fair Value | in Active Markets for | Other Observable Inputs | | | | | | | | | | | | | | | | | | | | |
| Identical Assets | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | | (Level 1) | | (Level 2) | | (Level 3) | | | | | | | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Government agencies | $ | 1,010 | | | $ | — | | | $ | 1,010 | | | $ | — | | | | | | | | | | | | | | | | | | | | | |
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State and municipal bonds | 78,532 | | | — | | | 78,532 | | | — | | | | | | | | | | | | | | | | | | | | | |
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Agency mortgage-backed securities/ collateralized mortgage obligations | 1,371,073 | | | — | | | 1,371,073 | | | — | | | | | | | | | | | | | | | | | | | | | |
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Non-agency collateralized mortgage obligations | 3,005 | | | — | | | 3,005 | | | — | | | | | | | | | | | | | | | | | | | | | |
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Corporate securities and other | 4,294 | | | 60 | | | 3,059 | | | 1,175 | | | | | | | | | | | | | | | | | | | | | |
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Marketable equity securities | 5,565 | | | 4,489 | | | — | | | 1,076 | | | | | | | | | | | | | | | | | | | | | |
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Investment securities, available-for-sale | $ | 1,463,479 | | | $ | 4,549 | | | $ | 1,456,679 | | | $ | 2,251 | | | | | | | | | | | | | | | | | | | | | |
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Interest rate swap agreements | $ | 20,811 | | | $ | — | | | $ | 20,811 | | | $ | — | | | | | | | | | | | | | | | | | | | | | |
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Interest rate locks | 71 | | | — | | | 71 | | | — | | | | | | | | | | | | | | | | | | | | | |
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Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Interest rate swap agreements | $ | 20,811 | | | $ | — | | | $ | 20,811 | | | $ | — | | | | | | | | | | | | | | | | | | | | | |
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Forward sale commitments | 127 | | | — | | | 127 | | | — | | | | | | | | | | | | | | | | | | | | | |
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31-Dec-13 | Total | | Quoted Prices | | Significant | | Significant Unobservable Inputs | | | | | | | | | | | | | | | | | | | | |
Fair Value | in Active Markets for | Other Observable Inputs | | | | | | | | | | | | | | | | | | | | |
| Identical Assets | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | | (Level 1) | | (Level 2) | | (Level 3) | | | | | | | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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U.S. Government agencies | $ | 990 | | | $ | — | | | $ | 990 | | | $ | — | | | | | | | | | | | | | | | | | | | | | |
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State and municipal bonds | 214,711 | | | — | | | 214,711 | | | — | | | | | | | | | | | | | | | | | | | | | |
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Agency mortgage-backed securities/ collateralized mortgage obligations | 1,659,180 | | | — | | | 1,659,180 | | | — | | | | | | | | | | | | | | | | | | | | | |
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Non-agency collateralized mortgage obligations | 4,258 | | | — | | | 4,258 | | | — | | | | | | | | | | | | | | | | | | | | | |
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Corporate securities and other | 9,668 | | | 61 | | | 4,922 | | | 4,685 | | | | | | | | | | | | | | | | | | | | | |
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Marketable equity securities | 5,300 | | | 4,241 | | | — | | | 1,059 | | | | | | | | | | | | | | | | | | | | | |
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Investment securities, available-for-sale | $ | 1,894,107 | | | $ | 4,302 | | | $ | 1,884,061 | | | $ | 5,744 | | | | | | | | | | | | | | | | | | | | | |
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Interest rate swap agreements | $ | 21,624 | | | $ | — | | | $ | 21,624 | | | $ | — | | | | | | | | | | | | | | | | | | | | | |
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Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Interest rate swap agreements | $ | 21,624 | | | $ | — | | | $ | 21,624 | | | $ | — | | | | | | | | | | | | | | | | | | | | | |
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Forward sale commitments | 84 | | | — | | | 84 | | | — | | | | | | | | | | | | | | | | | | | | | |
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Interest rate locks | 42 | | | — | | | 42 | | | — | | | | | | | | | | | | | | | | | | | | | |
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The following table presents activity for investment securities measured at fair value on a recurring basis for the six months ended June 30, 2014: |
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(dollars in thousands) | | | | | | | | | | | | | | | | |
| Beginning Balance | | Gains/(losses) | | Gains/(losses) | | Purchases | | Sales | | Maturities/ | | Reclassified | | Transfers | | Ending Balance |
Level 1 | 1-Jan-14 | included in | included in other | Calls/Paydowns | Securities (h) | 30-Jun-14 |
| | earnings (g) | comprehensive | | | |
| | | income | | | |
Corporate securities and other | $ | 61 | | | $ | — | | | $ | (1 | ) | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 60 | |
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Marketable equity securities | 4,241 | | | — | | | 248 | | | — | | | — | | | — | | | — | | | — | | | 4,489 | |
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Total level 1 | 4,302 | | | — | | | 247 | | | — | | | — | | | — | | | — | | | — | | | 4,549 | |
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Level 2 | | | | | | | | | | | | | | | | | | | | | | | | | | |
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U.S. Government agencies | 990 | | | — | | | 20 | | | — | | | — | | | — | | | — | | | — | | | 1,010 | |
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State and municipal bonds | 214,711 | | | 1,451 | | | 4,201 | | | — | | | — | | | (9,950 | ) | | (131,881 | ) | | — | | | 78,532 | |
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Agency mortgage-backed securities/ collateralized mortgage obligations | 1,659,180 | | | (1,975 | ) | | 26,781 | | | 162,357 | | | — | | | (124,630 | ) | | (350,640 | ) | | — | | | 1,371,073 | |
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Non-agency collateralized mortgage obligations | 4,258 | | | 9 | | | 16 | | | — | | | (476 | ) | | (802 | ) | | — | | | — | | | 3,005 | |
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Corporate securities and other | 4,922 | | | — | | | 148 | | | — | | | — | | | — | | | (2,011 | ) | | — | | | 3,059 | |
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Total level 2 | 1,884,061 | | | (515 | ) | | 31,166 | | | 162,357 | | | (476 | ) | | (135,382 | ) | | (484,532 | ) | | — | | | 1,456,679 | |
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Level 3 | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Corporate securities and other | 4,685 | | | 3 | | | 40 | | | — | | | — | | | — | | | (3,553 | ) | | — | | | 1,175 | |
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Marketable equity securities | 1,059 | | | — | | | 17 | | | — | | | — | | | — | | | — | | | — | | | 1,076 | |
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Total level 3 | 5,744 | | | 3 | | | 57 | | | — | | | — | | | — | | | (3,553 | ) | | — | | | 2,251 | |
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Total available-for-sale securities | $ | 1,894,107 | | | $ | (512 | ) | | $ | 31,470 | | | $ | 162,357 | | | $ | (476 | ) | | $ | (135,382 | ) | | $ | (488,085 | ) | | $ | — | | | $ | 1,463,479 | |
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(g) Includes amortization/accretion | | | | | | | | | | | | |
(h) Securities reclassified from available-for-sale to held-to-maturity at March 31, 2014. Refer to Footnote 4 for further details. |
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The following table sets forth the Company’s financial assets subject to fair value adjustments (impairment) on a non-recurring basis. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. |
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(dollars in thousands) | | | Quoted Prices | | Significant | | Significant Unobservable Inputs | | | | | | | | | | | | | | | | | | | | |
in Active Markets for | Other Observable Inputs | | | | | | | | | | | | | | | | | | | | |
Identical Assets | | | | | | | | | | | | | | | | | | | | | |
June 30, 2014 | Balance | | (Level 1) | | (Level 2) | | (Level 3) | | | | | | | | | | | | | | | | | | | | |
Loans held-for-sale | $ | 2,275 | | | $ | — | | | $ | 2,275 | | | $ | — | | | | | | | | | | | | | | | | | | | | | |
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Impaired loans, net | 41,965 | | | — | | | — | | | 41,965 | | | | | | | | | | | | | | | | | | | | | |
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OREO and other repossessed assets | 1,758 | | | — | | | — | | | 1,758 | | | | | | | | | | | | | | | | | | | | | |
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December 31, 2013 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Loans held-for-sale | $ | 4,951 | | | $ | — | | | $ | 4,951 | | | $ | — | | | | | | | | | | | | | | | | | | | | | |
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Impaired loans, net | 49,412 | | | — | | | — | | | 49,412 | | | | | | | | | | | | | | | | | | | | | |
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OREO and other repossessed assets | 1,278 | | | — | | | — | | | 1,278 | | | | | | | | | | | | | | | | | | | | | |
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Fair value for loans held-for-sale is estimated based upon available market data for mortgage-backed securities with similar interest rates and maturities. Lower of cost or estimated fair value write-downs recorded on loans held-for-sale were zero as of June 30, 2014 and December 31, 2013. |
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The recorded investment in impaired loans totaled $46.3 million with a specific reserve of $4.4 million at June 30, 2014, compared to $57.7 million with a specific reserve of $8.3 million at December 31, 2013. Fair value for impaired loans is measured primarily on the value of the collateral securing these loans, less estimated costs to sell, or the present value of estimated cash flows discounted at the loan’s original effective interest rate. Appraised values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. |
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Fair value for OREO and other repossessed assets is estimated based upon its appraised value less costs to sell. The period-ending OREO and other repossessed assets balances did not include additional write-downs at June 30, 2014 and included $0.1 million of additional write-downs at December 31, 2013. |
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In addition to financial instruments recorded at fair value in the Company’s financial statements, disclosure of the estimated fair value of all of an entity’s assets and liabilities considered to be financial instruments is also required. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments. However, certain instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Also, it is the Company’s general practice and intent to hold its financial instruments to maturity and to not engage in trading or sales activities, other than mortgage loans held-for-sale. Fair values have been estimated using data that management considered the best available and estimation methodologies deemed suitable for the pertinent category of financial instrument. |
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The estimation methodologies, resulting fair values and recorded carrying amounts are as follows: |
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| June 30, 2014 | | December 31, 2013 | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | | | | | | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 211,914 | | | $ | 211,914 | | | $ | 283,523 | | | $ | 283,523 | | | | | | | | | | | | | | | | | | | | | |
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Investment securities available-for-sale | 1,463,479 | | | 1,463,479 | | | 1,894,107 | | | 1,894,107 | | | | | | | | | | | | | | | | | | | | | |
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Investment securities held-to-maturity | 892,536 | | | 918,176 | | | 438,445 | | | 452,202 | | | | | | | | | | | | | | | | | | | | | |
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Loans held-for-sale | 2,275 | | | 2,331 | | | 4,951 | | | 5,077 | | | | | | | | | | | | | | | | | | | | | |
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Loans, net of allowance for loan losses | 5,313,908 | | | 5,221,446 | | | 5,236,901 | | | 5,168,470 | | | | | | | | | | | | | | | | | | | | | |
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OREO and other repossessed assets | 1,758 | | | 1,758 | | | 1,278 | | | 1,278 | | | | | | | | | | | | | | | | | | | | | |
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Interest rate swap agreements | 20,811 | | | 20,811 | | | 21,624 | | | 21,624 | | | | | | | | | | | | | | | | | | | | | |
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Interest rate locks | 71 | | | 71 | | | — | | | — | | | | | | | | | | | | | | | | | | | | | |
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Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Non-interest bearing deposits | $ | 1,031,271 | | | $ | 1,031,271 | | | $ | 970,051 | | | $ | 970,051 | | | | | | | | | | | | | | | | | | | | | |
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Interest bearing deposits, non-maturity | 3,926,676 | | | 3,926,676 | | | 3,852,036 | | | 3,852,036 | | | | | | | | | | | | | | | | | | | | | |
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Deposits with stated maturities | 1,150,536 | | | 1,150,306 | | | 1,250,491 | | | 1,253,920 | | | | | | | | | | | | | | | | | | | | | |
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Customer repurchase agreements | 587,686 | | | 587,686 | | | 551,736 | | | 551,736 | | | | | | | | | | | | | | | | | | | | | |
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Repurchase agreements | 50,000 | | | 50,195 | | | 50,000 | | | 51,332 | | | | | | | | | | | | | | | | | | | | | |
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Federal Home Loan Bank advances | 601,246 | | | 608,270 | | | 603,232 | | | 611,890 | | | | | | | | | | | | | | | | | | | | | |
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Subordinated debentures | 77,321 | | | 77,321 | | | 77,321 | | | 77,321 | | | | | | | | | | | | | | | | | | | | | |
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Interest rate swap agreements | 20,811 | | | 20,811 | | | 21,624 | | | 21,624 | | | | | | | | | | | | | | | | | | | | | |
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Forward sale commitments | 127 | | | 127 | | | 84 | | | 84 | | | | | | | | | | | | | | | | | | | | | |
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Interest rate locks | — | | | — | | | 42 | | | 42 | | | | | | | | | | | | | | | | | | | | | |
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The fair value of cash and cash equivalents have been estimated to equal the carrying amounts due to the short-term nature of these instruments. Therefore, cash and cash equivalents are classified within Level 1 of the fair value hierarchy. |
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The fair value of investment securities held-to-maturity has been estimated in a similar fashion to similar securities categorized as available-for-sale. Held-to-maturity securities include state and municipal bonds, collateralized mortgage obligations and mortgage-backed securities. These instruments are classified within Level 2 of the fair value hierarchy. |
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The fair value of the loan portfolio has been estimated using a discounted cash flow methodology based upon prevailing market interest rates relative to the portfolios’ effective interest rate which includes assumptions concerning prepayment rates and net credit losses. The loan portfolio is classified within Level 3 of the fair value hierarchy. |
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The fair value of non-interest bearing demand deposits has been estimated to equal the carrying amount, which is assumed to be the amount payable on demand at the balance sheet date and therefore are classified within Level 1 of the fair value hierarchy. |
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The fair value of interest bearing deposits excludes deposits with stated maturities and is based on the assumption that the exit value of the instruments would be funded with like instruments by principal market participants. These instruments are classified within Level 2 of the fair value hierarchy. |
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The fair value of deposits with stated maturities is estimated at the present value of associated cash flows using contractual maturities and market interest rates. These instruments are classified within Level 2 of the fair value hierarchy. |
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The fair value of customer repurchase agreements has been estimated at the present value of associated cash flows using contractual maturities and market interest rates for each instrument. These instruments are classified within Level 2 of the fair value hierarchy. |
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The fair value of repurchase agreements is determined based on current market rates for similar borrowings, as well as a further calculation for valuing the optionality of the conversion features in certain of the instruments. These instruments are classified within Level 2 of the fair value hierarchy. |
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The fair value of FHLB advances is determined based on current market rates for similar borrowings with similar credit ratings, as well as a further calculation for valuing the optionality of the conversion features in certain of the instruments. These instruments are classified within Level 2 of the fair value hierarchy. |
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The fair value of subordinated debentures is estimated to equal their par amount as these instruments have floating interest rates based upon LIBOR and are callable at any time. These instruments are classified within Level 2 of the fair value hierarchy. |