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16. Fair Value of Financial Instruments
 12 Months Ended
Dec. 31, 2012
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments

(16) Fair Value of Financial Instruments

 

The Company is required to disclose fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather a good faith estimate of the increase or decrease in the value of financial instruments held by the Company since purchase, origination, or issuance.

 

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.  These levels are:

 

·   Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

 

·   Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

 

·   Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market.  These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

 

Cash and Cash Equivalents

For cash, due from banks and interest-bearing deposits, the carrying amount is a reasonable estimate of fair value.

 

Investment Securities Available for Sale

Fair values of investment securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges when available. If quoted prices are not available, fair value is determined using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.  Fair values for investment securities with quoted market prices are reported in the Level 1 fair value category. Fair value measurements obtained from independent pricing services are reported in the Level 2 fair value category. All other fair value measurements are reported in the Level 3 fair value category.

 

Other Investments

For other investments, the carrying value is a reasonable estimate of fair value.

 

Mortgage Loans Held for Sale

Mortgage loans held for sale are carried at lower of aggregate cost or market value.  The cost of mortgage loans held for sale approximates the market value.  Mortgage loans held for sale are reported  in the Level 3 fair value category.

 

Loans

The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For variable rate loans, the carrying amount is a reasonable estimate of fair value.  Impaired loans with current certified appraisals are included in the Level 2 fair value category.  All other loans are included in the Level 3 fair value category, as the pricing of loans is more subjective than the pricing of other financial instruments.

 

Cash Surrender Value of Life Insurance

For cash surrender value of life insurance, the carrying value is a reasonable estimate of fair value.

 

Other Real Estate

The fair value of other real estate is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral.  Other real estate is reported in the Level 3 fair value category.

 

Deposits

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

 

Securities Sold Under Agreements to Repurchase

For securities sold under agreements to repurchase, the carrying value is a reasonable estimate of fair value.

 

FHLB Borrowings

The fair value of FHLB borrowings is estimated based upon discounted future cash flows using a discount rate comparable to the current market rate for such borrowings.

 

Junior Subordinated Debentures

Because the Company’s junior subordinated debentures were issued at a floating rate, the carrying amount is a reasonable estimate of fair value.

 

Commitments to Extend Credit and Standby Letters of Credit

Commitments to extend credit and standby letters of credit are generally short-term and at variable interest rates. Therefore, both the carrying value and estimated fair value associated with these instruments are immaterial.

 

Limitations

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 any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’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 deferred income taxes and premises and equipment. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

 

The carrying amount and estimated fair value of the Company’s financial instruments at December 31, 2012 and 2011 are as follows:

 

(Dollars in thousands)                              
          Fair Value Measurements at December 31, 2012  
    Carrying Amount     Level 1     Level 2     Level 3     Total  
Assets:                              
Cash and cash equivalents   $ 48,843       48,843       -       -       48,843  
Investment securities available for sale     297,823       1,468       295,105       1,250       297,823  
Other investments     5,599       -       -       5,599       5,599  
Mortgage loans held for sale     6,922       -       -       6,922       6,922  
Loans, net     605,551       -       -       599,996       599,996  
Cash surrender value of life insurance     13,273       -       13,273       -       13,273  
                                         
Liabilities:                                        
Deposits   $ 781,525       -       780,662       -       780,662  
Securities sold under agreements                                        
to repurchase     34,578       -       34,578       -       34,578  
FHLB borrowings     70,000       -       76,375       -       76,375  
Junior subordinated debentures     20,619       -       20,619       -       20,619  

 

(Dollars in thousands)            
    December 31, 2011  
    Carrying Amount     Estimated Fair Value  
Assets:            
Cash and cash equivalents   $ 29,236       29,236  
Investment securities available for sale     321,388       321,388  
Other investments     5,712       5,712  
Mortgage loans held for sale     5,146       5,146  
Loans, net     653,893       648,640  
Cash surrender value of life insurance     12,835       12,835  
                 
Liabilities:                
Deposits and demand notes payable   $ 827,111       826,810  
Securities sold under agreements                
to repurchase     39,600       39,600  
FHLB borrowings     70,000       75,046  
Junior subordinated debentures     20,619       20,619