Fair Value
 12 Months Ended
Dec. 31, 2013
Fair Value Disclosures [Abstract]  
Fair Value
Note 20 – Fair Value
Following is a description of the valuation methodologies, key inputs, and an indication of the level of the fair value hierarchy in which the assets or liabilities are classified.
Cash and cash equivalents: The carrying amounts of cash and short term investments, including Federal funds sold, approximate fair values. As such, we classify cash and demand deposits due from banks as Level 1.
Certificates of deposit held in other financial institutions: Interest bearing balances held in unaffiliated financial institutions include certificates of deposit and other short term interest bearing balances that mature within 3 years. Fair value is determined using prices for similar assets with similar characteristics. As such, we classify certificates of deposits held in other financial institutions as Level 2.
AFS and trading securities: AFS and trading securities are recorded at fair value on a recurring basis. Level 1 fair value measurement is based upon quoted prices for identical instruments. Level 2 fair value measurement is based upon quoted prices for similar instruments. 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 and liquidity assumptions. The values for Level 1 and Level 2 investment securities are generally obtained from an independent third party. On a quarterly basis, we compare the values provided to alternative pricing sources.
Mortgage loans AFS: Mortgage loans AFS are carried at the lower of cost or fair value. The fair value of Mortgage loans AFS are based on what price secondary markets are currently offering for portfolios with similar characteristics. As such, we classify Mortgage loans AFS subject to nonrecurring fair value adjustments as Level 2.
Loans: For variable rate loans with no significant change in credit risk, fair values are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The resulting amounts are adjusted to estimate the effect of changes in the credit quality of borrowers since the loans were originated. As such, we classify loans as Level 3 assets.
We do not record loans at fair value on a recurring basis. However, from time-to-time, loans are classified as impaired and a specific allowance for loan losses may be established. Loans for which it is probable that payment of interest and principal will be significantly different than the contractual terms of the original loan agreement are considered impaired. Once a loan is identified as impaired, we measure the estimated impairment. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, or discounted cash flows. 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.
We review the net realizable values of the underlying collateral for collateral dependent impaired loans on at least a quarterly basis for all loan types. To determine the collateral value, we utilize independent appraisals, broker price opinions, or internal evaluations. We review these valuations to determine whether an additional discount should be applied given the age of market information that may have been considered as well as other factors such as costs to carry and sell an asset if it is determined that the collateral will be liquidated in connection with the ultimate settlement of the loan. We use these valuations to determine if any charge-offs or specific reserves are necessary. We may obtain new valuations in certain circumstances, including when there has been significant deterioration in the condition of the collateral, if the foreclosure process has begun, or if the existing valuation is deemed to be outdated.
The following tables list the quantitative fair value information about impaired loans as of December 31:
 
2013
Valuation Techniques
Fair Value
 
Unobservable Input
 
Range
Discounted cash flow
$11,521
 
Duration of cash flows:
 
98 - 120 Months
 
 
 
Reduction in interest rate from original loan terms:
 
3.25% - 7.57%
 
 
 
Discount applied to collateral appraisal:
 
 
 
 
 
Real Estate
 
20% - 30%
 
 
 
Equipment
 
50%
Discounted appraisal value
$13,902
 
Livestock
 
50%
 
 
 
Cash crop inventory
 
50%
 
 
 
Other inventory
 
75%
 
 
 
Accounts receivable
 
75%
 
2012
Valuation Techniques
Fair Value
 
Unobservable Input
 
Range
Discounted cash flow
$8,726
 
Duration of cash flows:
 
14-120 Months
 
 
 
Reduction in interest rate from original loan terms:
 
5.00% - 6.25%
 
 
 
Discount applied to collateral appraisal:
 
 
 
 
 
Real Estate
 
20% - 30%
 
 
 
Equipment
 
50%
Discounted appraisal value
$13,295
 
Livestock
 
50%
 
 
 
Cash crop inventory
 
50%
 
 
 
Other inventory
 
75%
 
 
 
Accounts receivable
 
75%

Accrued interest receivable: The carrying amounts of accrued interest receivable approximate fair value. As such, we classify accrued interest receivable as Level 1.
Equity securities without readily determinable fair values: Included in equity securities without readily determinable fair values are FHLB stock and FRB stock as well as our ownership interests in Corporate Settlement Solutions, LLC and Valley Financial Corporation. The investment in Corporate Settlement Solutions, LLC, a title insurance company, was made in the first quarter 2007. We are not the managing entity of Corporate Settlement Solutions, LLC, and therefore, we account for our investment under the equity method of accounting. Valley Financial Corporation is the parent company of 1st State Bank in Saginaw, Michigan, which is a de novo bank that opened in 2005. We made investments in Valley Financial Corporation in 2004 and in 2007.
The lack of an active market, or other independent sources to validate fair value estimates coupled with the impact of future capital calls and transfer restrictions, is an inherent limitation in the valuation process. As the fair values of these investments are not readily determinable, they are not disclosed under a specific fair value hierarchy; however, they are reviewed quarterly for impairment. If we were to record an impairment adjustment related to these securities, it would be classified as a nonrecurring Level 3 fair value adjustment. During 2013 and 2012, there were no impairments recorded on equity securities without readily determinable fair values.
Foreclosed assets: Upon transfer from the loan portfolio, foreclosed assets (which are included in other assets) are adjusted to and subsequently carried at the lower of carrying value or fair value less costs to sell. Net realizable value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. Due to the inherent level of estimation in the valuation process, we record foreclosed assets as nonrecurring Level 3.
The table below lists the quantitative fair value information related to foreclosed assets as of:
 
December 31, 2013
Valuation Techniques
Fair Value
 
Unobservable Input
 
Range
 
 
 
Discount applied to collateral appraisal:
 
 
Discounted appraisal value
$
1,412

 
Real Estate
 
20% - 30%
 
December 31, 2012
Valuation Techniques
Fair Value
 
Unobservable Input
 
Range
 
 
 
Discount applied to collateral appraisal:
 
 
Discounted appraisal value
$
2,018

 
Real Estate
 
20% - 30%

Goodwill and other intangible assets: Acquisition intangibles and goodwill are evaluated for potential impairment on at least an annual basis. Acquisition intangibles and goodwill are typically qualitatively evaluated to determine if it is more likely than not that the carrying balance is impaired. If it is determined that the carrying balance of acquisition intangibles or goodwill is more likely than not to be impaired, we perform a cash flow valuation to determine the extent of the potential impairment. If the testing resulted in impairment, we would classify goodwill and other acquisition intangibles subjected to nonrecurring fair value adjustments as Level 3. During 2013 and 2012, there were no impairments recorded on goodwill and other acquisition intangibles.
OMSRs: OMSRs (which are included in other assets) are subject to impairment testing. To test for impairment, we utilize a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and discount rates. If the valuation model reflects a value less than the carrying value, OMSRs are adjusted to fair value through a valuation allowance as determined by the model. As such, we classify OMSRs subject to nonrecurring fair value adjustments as Level 2.
Deposits: The fair value of demand, savings, and money market deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts), and are classified as Level 1. Fair values for variable rate certificates of deposit approximate their recorded carrying value. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. As such, fixed rate certificates of deposit are classified as Level 2.
Borrowed funds: The carrying amounts of federal funds purchased, borrowings under overnight repurchase agreements, and other short-term borrowings maturing within ninety days approximate their fair values. The fair values of other borrowed funds are estimated using discounted cash flow analyses based on current incremental borrowing arrangements. As such, borrowed funds are classified as Level 2.
We previously elected to measure a portion of borrowed funds at fair value. These borrowings were recorded at fair value on a recurring basis, with the fair value measurement estimated using discounted cash flow analysis based on current incremental borrowing rates for similar types of borrowing arrangements. Changes in the fair value of these borrowings are included in noninterest income.
The activity in borrowings which we have elected to carry at fair value was as follows for the year ended December 31:
 
2012
Borrowings carried at fair value - beginning of year
$
5,242

Paydowns and maturities
(5,209
)
Net unrealized change in fair value
(33
)
Borrowings carried at fair value - December 31
$
—

Unpaid principal balance - December 31
$
—


Accrued interest payable: The carrying amounts of accrued interest payable approximate fair value. As such, we classify accrued interest payable as Level 1.
Commitments to extend credit, standby letters of credit, and undisbursed loans: Our commitments to extend credit, standby letters of credit, and undisbursed funds have no carrying amount and are estimated to have no realizable fair value. Historically, a majority of the unused commitments to extend credit have not been drawn upon and, generally, we do not receive fees in connection with these commitments other than standby letter of credit fees, which are not significant.
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Although we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.
Estimated Fair Values of Financial Instruments Not Recorded at Fair Value in their Entirety on a Recurring Basis
Disclosure of the estimated fair values of financial instruments, which differ from carrying values, often requires the use of estimates. In cases where quoted market values in an active market are not available, we use present value techniques and other valuation methods to estimate the fair values of our financial instruments. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.
The carrying amount and estimated fair value of financial instruments not recorded at fair value in their entirety on a recurring basis on our consolidated balance sheets are as follows as of as of December 31:
 
2013
 
Carrying
Value
 
Estimated
Fair Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
41,558

 
$
41,558

 
$
41,558

 
$
—

 
$
—

Certificates of deposit held in other financial institutions
580

 
582

 
—

 
582

 
—

Mortgage loans AFS
1,104

 
1,123

 
—

 
1,123

 
—

Total loans
808,037

 
808,246

 
—

 
—

 
808,246

Less allowance for loan and lease losses
(11,500
)
 
(11,500
)
 
—

 
—

 
(11,500
)
Net loans
796,537

 
796,746

 
—

 
—

 
796,746

Accrued interest receivable
5,442

 
5,442

 
5,442

 
—

 
—

Equity securities without readily determinable fair values (1)
18,293

 
18,293

 
—

 
—

 
—

OMSRs
2,555

 
2,667

 
—

 
2,667

 
—

LIABILITIES
 
 
 
 
 
 
 
 
 
Deposits without stated maturities
593,754

 
593,754

 
593,754

 
—

 
—

Deposits with stated maturities
450,012

 
452,803

 
—

 
452,803

 
—

Borrowed funds
279,326

 
283,060

 
—

 
283,060

 
—

Accrued interest payable
633

 
633

 
633

 
—

 
—

 
2012
 
Carrying
Value
 
Estimated
Fair Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
24,920

 
$
24,920

 
$
24,920

 
$
—

 
$
—

Certificates of deposit held in other financial institutions
4,465

 
4,475

 
—

 
4,475

 
—

Mortgage loans AFS
3,633

 
3,680

 
—

 
3,680

 
—

Total loans
772,753

 
784,964

 
—

 
—

 
784,964

Less allowance for loan and lease losses
(11,936
)
 
(11,936
)
 
—

 
—

 
(11,936
)
Net loans
760,817

 
773,028

 
—

 
—

 
773,028

Accrued interest receivable
5,227

 
5,227

 
5,227

 
—

 
—

Equity securities without readily determinable fair values (1)
18,118

 
18,118

 
—

 
—

 
—

OMSRs
2,285

 
2,285

 
—

 
2,285

 
—

LIABILITIES
 
 
 
 
 
 
 
 
 
Deposits without stated maturities
553,332

 
553,332

 
553,332

 
—

 
—

Deposits with stated maturities
464,335

 
472,630

 
—

 
472,630

 
—

Borrowed funds
241,001

 
248,822

 
—

 
248,822

 
—

Accrued interest payable
751

 
751

 
751

 
—

 
—

(1) 
Due to the characteristics of equity securities without readily determinable fair values, they are not disclosed under a specific fair value hierarchy. If we were to record an impairment adjustment related to these securities, such amount would be classified as a nonrecurring Level 3 fair value adjustment.
Financial Instruments Recorded at Fair Value
The table below presents the recorded amount of assets and liabilities measured at fair value on December 31:
 
2013
 
2012
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Recurring items
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
525

 
$
—

 
$
525

 
$
—

 
$
1,573

 
$
—

 
$
1,573

 
$
—

AFS securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored enterprises
23,745

 
—

 
23,745

 
—

 
25,776

 
—

 
25,776

 
—

States and political subdivisions
201,988

 
—

 
201,988

 
—

 
182,743

 
—

 
182,743

 
—

Auction rate money market preferred
2,577

 
—

 
2,577

 
—

 
2,778

 
—

 
2,778

 
—

Preferred stocks
5,827

 
5,827

 
—

 
—

 
6,363

 
6,363

 
—

 
—

Mortgage-backed securities
144,115

 
—

 
144,115

 
—

 
155,345

 
—

 
155,345

 
—

Collateralized mortgage obligations
133,810

 
—

 
133,810

 
—

 
131,005

 
—

 
131,005

 
—

Total AFS securities
512,062

 
5,827

 
506,235

 
—

 
504,010

 
6,363

 
497,647

 
—

Nonrecurring items
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans (net of the ALLL)
25,423

 
—

 
—

 
25,423

 
22,021

 
—

 
—

 
22,021

Foreclosed assets
1,412

 
—

 
—

 
1,412

 
2,018

 
—

 
—

 
2,018

 
$
539,422

 
$
5,827

 
$
506,760

 
$
26,835

 
$
529,622

 
$
6,363

 
$
499,220

 
$
24,039

Percent of assets and liabilities measured at fair value
 
 
1.08
%
 
93.95
%
 
4.97
%
 
 
 
1.20
%
 
94.26
%
 
4.54
%

The following table provides a summary of the changes in fair value of assets and liabilities recorded at fair value through earnings on a recurring basis and changes in assets and liabilities recorded at fair value on a nonrecurring basis, for which gains or losses were recognized in the years ended December 31:
 
2013
 
2012

Trading
Losses
 
Other Gains
(Losses)
 
Total
 
Trading
Losses
 
Other Gains
(Losses)
 
Total
Recurring items
 
 
 
 
 
 
 
 
 
 
 
Trading securities
$
(28
)
 
$
—

 
$
(28
)
 
$
(52
)
 
$
—

 
$
(52
)
Borrowed funds
—

 
—

 
—

 
—

 
33

 
33

Nonrecurring items
 
 
 
 
 
 
 
 
 
 

Foreclosed assets
—

 
(156
)
 
(156
)
 
—

 
(166
)
 
(166
)
Total
$
(28
)
 
$
(156
)
 
$
(184
)
 
$
(52
)
 
$
(133
)
 
$
(185
)