19. Fair Value Disclosures

The Company groups its financial assets and liabilities measured at fair value in three levels as required by ASC 820, Fair Value Measurements and Disclosures. Under this guidance, fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes a fair value hierarchy that prioritizes the inputs used to develop those assumptions and measure fair value. The hierarchy requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

•

Level 1 – Quoted prices in active markets for identical assets or liabilities.

•

Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

•

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

An asset’s or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Management reviews and updates the fair value hierarchy classifications of the Company’s assets and liabilities on a quarterly basis.

Recurring Basis

Investment Securities Available for Sale

Fair values of investment securities available for sale are primarily measured using information from a third-party pricing service. This pricing service provides pricing information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data from market research publications. If quoted prices are available in an active market, investment securities are classified as Level 1 measurements. If quoted prices are not available in an active market, fair values were estimated primarily by the use of pricing models. Level 2 investment securities were primarily comprised of mortgage-backed securities issued by government agencies and U.S. government-sponsored enterprises. In certain cases, where there is limited or less transparent information provided by the Company’s third-party pricing service, fair value is estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes. Investment securities are classified within Level 3 when little or no market activity supports the fair value.

Management primarily identifies investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume and frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. Investment securities that are deemed to have been trading in illiquid or inactive markets may require the use of significant unobservable inputs. For example, management may use quoted prices for similar investment securities in the absence of a liquid and active market for the investment securities being valued. As of December 31, 2013, management did not make adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets.

The following tables present the balances of assets and liabilities measured on a recurring basis as of December 31, 2013 and 2012 aggregated by the level in the fair value hierarchy in which these measurements fall.


*(dollars in thousands)*	December 31, 2013		Level 1		Level 2		Level 3
Available for sale securities:
U.S. agency mortgage-backed	$	96,785	$	—	$	96,785	$	—
Non-U.S. agency mortgage-backed		9,749		—		9,749		—
Municipal bonds		19,799		—		19,799		—
U.S. government agency		23,299		—		23,299		—

Total	$	149,632	$	—	$	149,632	$	—


*(dollars in thousands)*	December 31, 2012		Level 1		Level 2		Level 3
Available for sale securities:
U.S. agency mortgage-backed	$	102,513	$	—	$	102,513	$	—
Non-U.S. agency mortgage-backed		12,668		—		12,668		—
Municipal bonds		17,585		—		17,585		—
U.S. government agency		24,490		—		24,490		—

Total	$	157,256	$	—	$	157,256	$	—

The Company did not record any liabilities at fair value for which measurement of the fair value was made on a recurring basis.

Nonrecurring Basis

In accordance with the provisions of ASC 310, Receivables, the Company records loans considered impaired at their fair value. A loan is considered impaired if it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Fair value is measured at the fair value of the collateral for collateral-dependent loans. For non-collateral-dependent loans, fair value is measured by present valuing expected future cash flows. Impaired loans are classified as Level 3 assets when measured using appraisals from external parties of the collateral less any prior liens. Repossessed assets are initially recorded at fair value less estimated costs to sell. The fair value of repossessed assets is based on property appraisals and an analysis of similar properties available. As such, the Company classifies repossessed assets as Level 3 assets.

Acquired loans with deteriorated credit quality, the FDIC loss sharing receivable, and acquired interest-bearing deposit liabilities are measured on a nonrecurring basis using significant unobservable inputs (Level 3).

The Company has segregated all financial assets and liabilities that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below.


			Fair Value Measurements Using
*(dollars in thousands)*	December 31, 2013		Level 1		Level 2		Level 3

Assets
Acquired loans with deteriorated credit quality	$	26,220	$	—	$	—	$	26,220
Acquired loans without deteriorated credit quality		85,732		—		—		85,732
Impaired loans excluding acquired loans		2,099		—		—		2,099
Repossessed assets		4,566		—		—		4,566
FDIC loss sharing receivable		12,698		—		—		12,698

Total	$	131,315	$	—	$	—	$	131,315


Liabilities
Deposits acquired through business combinations	$	39,010	$	—	$	—	$	39,010
FHLB advances acquired through business combinations		—		—		—		—

Total	$	39,010	$	—	$	—	$	39,010


			Fair Value Measurements Using
*(dollars in thousands)*	December 31, 2012		Level 1		Level 2		Level 3

Assets
Acquired loans with deteriorated credit quality	$	50,854	$	—	$	—	$	50,854
Acquired loans without deteriorated credit quality		117,536		—		—		117,536
Impaired loans excluding acquired loans		5,353		—		—		5,353
Repossessed assets		6,454		—		—		6,454
FDIC loss sharing receivable		15,546		—		—		15,546

Total	$	195,743	$	—	$	—	$	195,743


Liabilities
Deposits acquired through business combinations	$	81,948	$	—	$	—	$	81,948
FHLB advances acquired through business combinations		18,257		—		—		18,257

Total	$	100,205	$	—	$	—	$	100,205

ASC 820, Fair Value Measurements and Disclosures, requires the disclosure of each class of financial instruments for which it is practicable to estimate. The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. ASC 820 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.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement element. 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 included herein are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the fair value of assets and liabilities that are not required to be recorded or disclosed at fair value like premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

The carrying value of cash and cash equivalents and interest-bearing deposits in banks approximate their fair value.

The fair value for investment securities is determined from quoted market prices when available. If a quoted market price is not available, fair value is estimated using third party pricing services or quoted market prices of securities with similar characteristics.

The carrying value of mortgage loans held for sale approximates its fair value.

The fair value of loans are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturity.

The cash surrender value of bank-owned life insurance (“BOLI”) approximates its fair value.

The fair value of the FDIC loss sharing receivable is determined by discounting projected cash flows from loss sharing agreements based on expected reimbursements for losses at the applicable loss sharing percentages based on the terms of the loss sharing agreements.

The fair value of demand deposits, savings and interest-bearing demand deposits is the amount payable on demand. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.

The carrying amount of the FHLB advances is estimated using the rates currently offered for advances of similar maturities.

The fair value of off-balance sheet financial instruments as of December 31, 2013 and 2012 was immaterial.


			Fair Value Measurements at December 31, 2013
	Carrying Amount		Total		Level 1		Level 2		Level 3
*(dollars in thousands)*	Carrying Amount		Total		Level 1		Level 2		Level 3

Financial Assets
Cash and cash equivalents	$	32,639	$	32,639	$	32,639	$	—	$	—
Interest-bearing deposits in banks		2,940		2,940		2,940		—		—
Investment securities available for sale		149,632		149,632		—		149,632		—
Investment securities held to maturity		9,405		9,275		—		9,275		—
Mortgage loans held for sale		1,951		1,951		—		1,951		—
Loans, net		700,538		708,863		—		—		708,863
Cash surrender value of BOLI		17,751		17,751		17,751		—		—
FDIC loss sharing receivable		12,698		12,698		—		—		12,698

Financial Liabilities
Deposits	$	741,312	$	702,168	$	—	$	663,158	$	39,010
Short-term FHLB advances		87,000		87,000		87,000		—		—
Long-term FHLB advances		10,000		10,613		—		10,613		—


			Fair Value Measurements at December 31, 2012
*(dollars in thousands)*	Carrying Amount		Total		Level 1		Level 2		Level 3
*(dollars in thousands)*	Carrying Amount		Total		Level 1		Level 2		Level 3

Financial Assets
Cash and cash equivalents	$	39,539	$	39,539	$	39,529	$	—	$	—
Interest-bearing deposits in banks		3,529		3,529		3,529		—		—
Investment securities available for sale		157,256		157,256		—		157,256		—
Investment securities held to maturity		1,665		1,746		—		1,746		—
Mortgage loans held for sale		5,627		5,627		—		5,627		—
Loans, net		667,809		676,622		—		—		676,622
Cash surrender value of BOLI		17,286		17,286		17,286		—		—
FDIC loss sharing receivable		15,546		15,546		—		—		15,546

Financial Liabilities
Deposits	$	771,429	$	774,325	$	—	$	692,377	$	81,948
Short-term FHLB advances		10,000		10,000		10,000		—		—
Long-term FHLB advances		36,257		37,619		—		19,362		18,257