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Fair Value of Financial Instruments | 6 Months Ended
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Jun. 30, 2013
Fair Value of Financial Instruments [Abstract] |
Fair Value of Financial Instruments | Note 8 – Fair Value of Financial Instruments The Corporation complies with the guidance of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements. The Corporation also follows the guidance on matters relating to all financial instruments found in ASC Subtopic 825-10, Financial Instruments – Overall. Fair value is defined as the price to sell an asset or to transfer a liability in an orderly transaction between willing market participants as of the measurement date. Fair value is best determined by values quoted through active trading markets. Active trading markets are characterized by numerous transactions of similar financial instruments between willing buyers and willing sellers. Because no active trading market exists for various types of financial instruments, many of the fair values disclosed were derived using present value discounted cash flows or other valuation techniques described below. As a result, the Corporation’s ability to actually realize these derived values cannot be assumed. T he Corporation measures fair values based on the fair value hierarchy established in ASC Paragraph 820-10-35-37. 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 inputs that may be used to measure fair value under the hierarchy are as follows: Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities. This level is the most reliable source of valuation. Level 2: Quoted prices that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. Level 2 inputs include inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates). It also includes inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs). Several sources are utilized for valuing these assets, including a contracted valuation service, Standard & Poor’s (“S&P”) evaluations and pricing services, and other valuation matrices. Level 3: Prices or valuation techniques that require inputs that are both significant to the valuation assumptions and not readily observable in the market (i.e. supported with little or no market activity). Level 3 instruments are valued based on the best available data, some of which is internally developed, and consider risk premiums that a market participant would require. The level established within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Corporation believes that its valuation techniques are appropriate and consistent with the techniques used by other market participants. However, the use of different methodologies and assumptions could result in a different estimate of fair values at the reporting date. T he valuation techniques used by the Corporation to measure, on a recurring and non-recurring basis, the fair value of assets as of June 30, 2013 are discussed in the paragraphs that follow. Investments – The investment portfolio is classified and accounted for based on the guidance of ASC Topic 320, Investments – Debt and Equity Securities. The fair value of investments available-for-sale is determined using a market approach. As of June 30, 2013, the U.S. Government agencies, residential and commercial mortgage-backed securities, and municipal bonds segments are classified as Level 2 within the valuation hierarchy. Their fair values were determined based upon market-corroborated inputs and valuation matrices, which were obtained through third party data service providers or securities brokers through which the Corporation has historically transacted both purchases and sales of investment securities. The CDO segment, which consists of pooled trust preferred securities issued by banks, thrifts and insurance companies, is classified as Level 3 within the valuation hierarchy. At June 30, 2013, the Corporation owned 18 pooled trust preferred securities with an amortized cost of $3 7.0 million and a fair value of $1 5.0 million. The market for these securities at June 30, 2013 is not active and markets for similar securities are also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which these securities trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive, as few CDOs have been issued since 2007. There are currently very few market participants who are willing to effect transactions in these securities. The market values for these securities or any securities other than those issued or guaranteed by the U.S. Department of the Treasury (the “Treasury”) are depressed relative to historical levels. Therefore, in the current market, a low market price for a particular bond may only provide evidence of stress in the credit markets in general rather than being an indicator of credit problems with a particular issue. Given the conditions in the current debt markets and the absence of observable transactions in the secondary and new issue markets, management has determined that (a) the few observable transactions and market quotations that are available are not reliable for the purpose of obtaining fair value at June 30, 2013, (b) an income valuation approach technique (i.e. present value) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than a market approach, and (c) the CDO segment is appropriately classified within Level 3 of the valuation hierarchy because management determined that significant adjustments were required to determine fair value at the measurement date. Management utilizes an independent third party to prepare both the evaluations of OTTI as well as the fair value determinations for its CDO portfolio. Management does not believe that there were any material differences in the OTTI evaluations and pricing between June 30, 2013 and December 31, 2012. The approach used by the third party to determine fair value involves several steps, including detailed credit and structural evaluation of each piece of collateral in each bond, default, recovery and prepayment/amortization probabilities for each piece of collateral in the bond, and discounted cash flow modeling. The discount rate methodology used by the third party combines a baseline current market yield for comparable corporate and structured credit products with adjustments based on evaluations of the differences found in structure and risks associated with actual and projected credit performance of each CDO being valued. Currently, the only active and liquid trading market that exists is for stand-alone trust preferred securities. Therefore, adjustments to the baseline discount rate are also made to reflect the additional leverage found in structured instruments. Derivative financial instruments (Cash flow hedge) – The Corporation’s open derivative positions are interest rate swaps that are classified as Level 3 within the valuation hierarchy. Open derivative positions are valued using externally developed pricing models based on observable market inputs provided by a third party and validated by management. The Corporation has considered counterparty credit risk in the valuation of its interest rate swap assets. Impaired loans – Loans included in the table below are those that are considered impaired with a specific allocation or with a partial charge-off, based upon the guidance of the loan impairment subsection of the Receivables Topic, ASC Section 310-10-35, under which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Fair value consists of the loan balance less its valuation allowance and is generally determined based on independent third-party appraisals of the collateral or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements. Other real estate owned – Other real estate owned included in the table below are considered impaired with specific write-downs. Fair value of other real estate owned is based on independent third-party appraisals of the properties. These values were determined based on the sales prices of similar properties in the approximate geographic area. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements. For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of June 30, 2013, the significant unobservable inputs used in the fair value measurements were as follows:
|  | Fair Value at June 30, 2013 | Valuation Technique | Significant Unobservable Inputs | Significant Unobservable Input Value
Recurring: |  |  |  |  |
Investment Securities – available for sale | $ | 15,030 | Discounted Cash Flow | Discount Rate | Swap+17%; Range of Libor+ 6.25% to 18%
Cash Flow Hedge | $ | (619) | Discounted Cash Flow | Reuters Third Party Market Quote | 99.9% (weighted avg 99.9%)
Non-recurring: |  |  |  |  |
Impaired Loans | $ | 14,550 | Market Comparable Properties | Marketability Discount | 10% (1) (weighted avg 10%)
OREO | $ | 111 | Market Comparable Properties | Marketability Discount | 10% (1) (weighted avg 10%)
(1) | Range would include discounts taken since appraisal and estimated values
For assets measured at fair value on a recurring and non-recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2013 and December 31, 2012 are as follows:
|  |  |  | Fair Value Measurements at
|  |  |  | June 30, 2013 Using
|  |  |  | (In Thousands)
|  | Assets Measured at Fair Value |  | Quoted Prices in Active Markets for Identical Assets |  | Significant Other Observable Inputs |  | Significant Unobservable Inputs
Description |  | 06/30/2013 |  | (Level 1) |  | (Level 2) |  | (Level 3)
Recurring: |  |  |  |  |  |  |  |
Investment securities available-for-sale: |  |  |  |  |  |  |  |
U.S. government agencies | $ | 91,134 |  |  | $ | 91,134 |  |
Residential mortgage-backed agencies | $ | 84,687 |  |  | $ | 84,687 |  |
Commercial mortgage-backed agencies | $ | 35,228 |  |  | $ | 35,228 |  |
Collateralized mortgage obligations | $ | 19,525 |  |  | $ | 19,525 |  |
Obligations of states and political subdivisions | $ | 59,077 |  |  | $ | 59,077 |  |
Collateralized debt obligations | $ | 15,030 |  |  |  |  | $ | 15,030
Financial Derivative | $ | (619) |  |  |  |  | $ | (619)
Non-recurring: |  |  |  |  |  |  |  |
Impaired loans | $ | 14,550 |  |  |  |  | $ | 14,550
Other real estate owned | $ | 111 |  |  |  |  | $ | 111
|  |  |  | Fair Value Measurements at
|  |  |  | December 31, 2012 Using
|  |  |  | (In Thousands)
|  | Assets Measured at Fair Value |  | Quoted Prices in Active Markets for Identical Assets |  | Significant Other Observable Inputs |  | Significant Unobservable Inputs
Description |  | 12/31/2012 |  | (Level 1) |  | (Level 2) |  | (Level 3)
Recurring: |  |  |  |  |  |  |  |
Investment securities available-for-sale: |  |  |  |  |  |  |  |
U.S. government agencies | $ | 40,320 |  |  | $ | 40,320 |  |
Residential mortgage-backed agencies | $ | 44,108 |  |  | $ | 44,108 |  |
Commercial mortgage-backed agencies | $ | 37,618 |  |  | $ | 37,618 |  |
Collateralized mortgage obligations | $ | 31,731 |  |  | $ | 31,731 |  |
Obligations of states and political subdivisions | $ | 58,054 |  |  | $ | 58,054 |  |
Collateralized debt obligations | $ | 11,442 |  |  |  |  | $ | 11,442
Financial Derivative | $ | (849) |  |  |  |  | $ | (849)
Non-recurring: |  |  |  |  |  |  |  |
Impaired loans | $ | 13,560 |  |  |  |  | $ | 13,560
Other real estate owned | $ | 3,165 |  |  |  |  | $ | 3,165
There were no transfers of assets between any of the fair value hierarchy for the six months ended June 30, 2013 or June 30, 2012. The following tables show a reconciliation of the beginning and ending balances for fair valued assets measured on a recurring basis using Level 3 significant unobservable inputs for the six- and three-months ended June 30, 2013 and 2012:
|  | Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
|  | (In Thousands)
|  | Investment Securities |  | Cash Flow
|  | Available for Sale |  | Hedge
Beginning balance January 1, 2013 | $ | 11,442 | $ | (849)
Total gains/(losses) realized/unrealized: |  |  |  |
Included in other comprehensive income |  | 3,588 |  | 230
Ending balance June 30, 2013 | $ | 15,030 | $ | (619)
The amount of total gains or losses for the period |  |  |  |
included in earnings attributable to the change in |  |  |  |
realized/unrealized gains or losses related to assets |  |  |  |
still held at the reporting date | $ | 0 | $ | 0
|  | Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
|  | (In Thousands)
|  | Investment Securities |  | Cash Flow
|  | Available for Sale |  | Hedge
Beginning balance April 1, 2013 | $ | 13,798 | $ | (747)
Total gains/(losses) realized/unrealized: |  |  |  |
Included in other comprehensive income |  | 1,232 |  | 128
Ending balance June 30, 2013 | $ | 15,030 | $ | (619)
The amount of total gains or losses for the period |  |  |  |
included in earnings attributable to the change in |  |  |  |
realized/unrealized gains or losses related to assets |  |  |  |
still held at the reporting date | $ | 0 | $ | 0
|  | Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
|  | (In Thousands)
|  | Investment Securities |  | Cash Flow
|  | Available for Sale |  | Hedge
Beginning balance January 1, 2012 | $ | 9,447 | $ | (1,034)
Total gains/(losses) realized/unrealized: |  |  |  |
Included in other comprehensive income |  | (108) |  | 79
Ending balance June 30, 2012 | $ | 9,339 | $ | (955)
The amount of total gains or losses for the period |  |  |  |
included in earnings attributable to the change in |  |  |  |
realized/unrealized gains or losses related to assets |  |  |  |
still held at the reporting date | $ | 0 | $ | 0
|  | Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
|  | (In Thousands)
|  | Investment Securities |  | Cash Flow
|  | Available for Sale |  | Hedge
Beginning balance April 1, 2012 | $ | 9,954 | $ | (988)
Total gains/(losses) realized/unrealized: |  |  |  |
Included in other comprehensive income |  | (615) |  | 33
Ending balance June 30, 2012 | $ | 9,339 | $ | (955)
The amount of total gains or losses for the period |  |  |  |
included in earnings attributable to the change in |  |  |  |
realized/unrealized gains or losses related to assets |  |  |  |
still held at the reporting date | $ | 0 | $ | 0
Gains and losses (realized and unrealized) included in earnings for the periods above are reported in the Consolidated Statement of Operations in Other Operating Income. The disclosed fair values may vary significantly between institutions based on the estimates and assumptions used in the various valuation methodologies. The derived fair values are subjective in nature and involve uncertainties and significant judgment. Therefore, they cannot be determined with precision. Changes in the assumptions could significantly impact the derived estimates of fair value. Disclosure of non-financial assets such as buildings as well as certain financial instruments such as leases is not required. Accordingly, the aggregate fair values presented do not represent the underlying value of the Corporation. The following methods and assumptions were used by the Corporation to estimate its fair value disclosures for financial instruments: Cash and due from banks: The carrying amounts as reported in the statement of financial condition for cash and due from banks approximate their fair values. Interest bearing deposits in banks: The carrying amount of interest bearing deposits approximates their fair values. Securities held to maturity: Investments in debt securities classified as held to maturity are measured subsequently at amortized cost in the statement of financial position. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements. Restricted Investment in Bank stock: The carrying value of stock issued by the FHLB of Atlanta, ACBB and CBB approximates fair value based on the redemption provisions of the stock. Loans (excluding impaired loans with specific loss allowances): For variable-rate loans that re-price frequently or “in one year or less”, and with no significant change in credit risk, fair values are based on carrying values. Fair values for fixed-rate loans that do not re-price frequently are estimated using a discounted cash flow calculation that applies current market interest rates being offered on the various loan products. Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and certain types of money market accounts, etc.) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on the various certificates of deposit to the cash flow stream. Borrowed funds: The fair value of the Bank’s FHLB borrowings and junior subordinated debt is calculated based on the discounted value of contractual cash flows, using rates currently existing for borrowings with similar remaining maturities. The carrying amounts of federal funds purchased and securities sold under agreements to repurchase approximate their fair values. Accrued Interest: The carrying amount of accrued interest receivable and payable approximates their fair values. Off-Balance-Sheet Financial Instruments: In the normal course of business, the Bank makes commitments to extend credit and issues standby letters of credit. The Bank expects most of these commitments to expire without being drawn upon; therefore, the commitment amounts do not necessarily represent future cash requirements. Due to the uncertainty of cash flows and difficulty in the predicting the timing of such cash flows, fair values were not estimated for these instruments. The following tables present fair value information about financial instruments, whether or not recognized in the Consolidated Statement of Financial Condition, for which it is practicable to estimate that value. The actual carrying amounts and estimated fair values of the Corporation’s financial instruments that are included in the Consolidated Statement of Financial Condition are as follows:
| June 30, 2013 |  | Fair Value Measurements
| Carrying | Fair | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs
(in thousands) | Amount | Value | (Level 1) | (Level 2) | (Level 3)
Financial Assets: |  |  |  |  |  |  |  |  |  |
Cash and due from banks | $ | 28,160 | $ | 28,160 | $ | 28,160 |  |  |  |
Interest bearing deposits in banks |  | 13,909 |  | 13,909 |  | 13,909 |  |  |  |
Investment securities - AFS |  | 304,681 |  | 304,681 |  |  | $ | 289,651 | $ | 15,030
Investment securities - HTM |  | 3,900 |  | 3,913 |  |  |  |  |  | 3,913
Restricted Bank stock |  | 7,853 |  | 7,853 |  |  |  | 7,853 |  |
Loans, net |  | 826,328 |  | 831,579 |  |  |  |  |  | 831,579
Accrued interest receivable |  | 4,496 |  | 4,496 |  |  |  | 4,496 |  |
Financial Liabilities: |  |  |  |  |  |  |  |  |  |
Deposits – non-maturity |  | 611,914 |  | 611,914 |  |  |  | 611,914 |  |
Deposits – time deposits |  | 360,745 |  | 368,674 |  |  |  | 368,674 |  |
Short-term borrowed funds |  | 50,954 |  | 50,954 |  |  |  | 50,954 |  |
Long-term borrowed funds |  | 182,704 |  | 189,834 |  |  |  | 189,834 |  |
Accrued interest payable |  | 6,439 |  | 6,439 |  |  |  | 6,439 |  |
Financial derivative |  | 619 |  | 619 |  |  |  |  |  | 619
Off balance sheet financial instruments |  | 0 |  | 0 |  | 0 |  |  |  |
| December 31, 2012 |  | Fair Value Measurements
| Carrying | Fair | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs
(in thousands) | Amount | Value | (Level 1) | (Level 2) | (Level 3)
Financial Assets: |  |  |  |  |  |  |  |  |  |
Cash and due from banks | $ | 71,290 | $ | 71,290 | $ | 71,290 |  |  |  |
Interest bearing deposits in banks |  | 11,778 |  | 11,778 |  | 11,778 |  |  |  |
Investment securities - AFS |  | 223,273 |  | 223,273 |  |  | $ | 211,831 | $ | 11,442
Investment securities - HTM |  | 4,040 |  | 4,347 |  |  |  |  |  | 4,347
Restricted Bank stock |  | 8,349 |  | 8,349 |  |  |  | 8,349 |  |
Loans, net |  | 858,782 |  | 865,405 |  |  |  |  |  | 865,405
Accrued interest receivable |  | 4,494 |  | 4,494 |  |  |  | 4,494 |  |
Financial Liabilities: |  |  |  |  |  |  |  |  |  |
Deposits- non-maturity |  | 593,224 |  | 593,224 |  |  |  | 593,224 |  |
Deposits- time deposits |  | 383,660 |  | 392,155 |  |  |  | 392,155 |  |
Short-term borrowed funds |  | 39,257 |  | 39,257 |  |  |  | 39,257 |  |
Long-term borrowed funds |  | 182,735 |  | 190,531 |  |  |  | 190,531 |  |
Accrued interest payable |  | 5,415 |  | 5,415 |  |  |  | 5,415 |  |
Financial derivative |  | 849 |  | 849 |  |  |  |  |  | 849
Off balance sheet financial instruments |  | 0 |  | 0 |  | 0 |  |  |  |
Loans are measured using a discounted cash flow method. The significant unobservable inputs used in the Level 3 fair value measurements of the Corporation’s loans included in the tables above are calculated based on the Corporation’s internal new volume rate.

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- 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 Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13537-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13433-108611 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=25499696&loc=d3e19207-110258 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13504-108611 + Details
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