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Fair Value of Financial Instruments | 6 Months Ended
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Jun. 30, 2014
Fair Value Disclosures [Abstract] |
Fair Value of Financial Instruments |
5. | FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company follows the provisions of Accounting Standards Codification (“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. Fair Value Hierarchy 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 represent a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. In determining fair value, the Company uses various methods, including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
| • |  | Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange or NASDAQ. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
| • |  | Level 2 — Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
| • |  | Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
The Company rarely transfers assets and liabilities measured at fair value between Level 1 and Level 2 measurements. Trading account assets and securities available-for-sale may be periodically transferred to or from Level 3 valuation based on management’s conclusion regarding the best method of pricing for an individual security. Such transfers are accounted for as if they occurred at the beginning of a reporting period. There were no such transfers during the periods ended June 30, 2014 or December 31, 2013. Fair Value Measurements on a Recurring Basis Available-for-Sale Securities Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include exchange traded equities. Level 2 securities include U.S. treasury and agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. Level 2 fair values are obtained from quoted prices of securities with similar characteristics. In certain cases, where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Interest Rate Cap Derivative Agreements Interest rate cap agreements were included in other assets at fair value on the Company’s balance sheet as of June 30, 2014. The interest rate caps qualify as derivatives, but are not designated as hedging instruments. Accordingly, changes in fair value are included in results of operations. The fair value of these agreements was based on information obtained from a third party financial institution. This information is periodically evaluated by the Company and, as necessary, corroborated against other third party valuations. The Company classified these derivative assets within Level 2 of the valuation hierarchy. The following table presents assets measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013. There were no liabilities measured at fair value on a recurring basis for either period presented.
|  | Fair Value Measurements as of June 30, 2014 Using |
|  | Totals At June 30, 2014 |  |  | Quoted Prices in Active Markets For Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
|  | (Dollars in Thousands) |
Investment securities, available-for-sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential |  | $ | 111,896 |  |  | $ | — |  |  | $ | 111,896 |  |  | $ | — |
Commercial |  |  | 36,233 |  |  |  | — |  |  |  | 36,233 |  |  |  | — |
Obligations of states and political subdivisions |  |  | 16,641 |  |  |  | — |  |  |  | 16,641 |  |  |  | — |
U.S. treasury securities |  |  | 3,929 |  |  |  | — |  |  |  | 3,929 |  |  |  | — |
Obligations of U.S. government sponsored agencies |  |  | 411 |  |  |  | — |  |  |  | 411 |  |  |  | — |
Other assets - derivatives |  |  | 69 |  |  |  | — |  |  |  | 69 |  |  |  | — |
|  | Fair Value Measurements as of December 31, 2013 Using |
|  | Totals At December 31, 2013 |  |  | Quoted Prices in Active Markets For Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
|  | (Dollars in Thousands) |
Investment securities, available-for-sale |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential |  | $ | 83,434 |  |  | $ | — |  |  | $ | 83,434 |  |  | $ | — |
Commercial |  |  | 30,465 |  |  |  | — |  |  |  | 30,465 |  |  |  | — |
Obligations of states and political subdivisions |  |  | 17,027 |  |  |  | — |  |  |  | 17,027 |  |  |  | — |
U.S. treasury securities |  |  | 3,827 |  |  |  | — |  |  |  | 3,827 |  |  |  | — |
Obligations of U.S. government sponsored agencies |  |  | 1,001 |  |  |  | — |  |  |  | 1,001 |  |  |  | — |
Fair Value Measurements on a Non-recurring Basis Impaired Loans Estimates of fair value for impaired loans are determined based on a variety of information, including the use of available appraisals, estimates of market value by licensed appraisers or local real estate brokers and the knowledge and experience of the Company’s management related to the assessment of collateral associated with loans. Management takes into consideration the type, location and occupancy of the collateral, as well as current economic conditions in the area in which the collateral is located, in assessing estimates of fair value. Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate or the fair value of collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to increase, such increase is reported as a component of the provision for loan losses. When an impaired loan is determined to be collateral dependent, the fair value is determined through the utilization of a third-party appraisal. It is the policy of the Company to update appraisals every 18-24 months. The types of collateral influence the frequency of obtaining updated appraisals. Management knows the market trends of collateral values well and monitors trends in sales and valuations in all of the various categories of collateral. These trends influence how often new appraisals are obtained within the 18-24 month timeframe. An example would be loans collateralized by residential subdivision lots. The values of this type of collateral have been volatile in recent years, and, therefore, appraisals are generally updated at the lower end of the timeframe (i.e., closer to 18 months), while timberland appraisals, which have been less volatile in recent years, would be updated closer to the upper end of the timeframe (i.e., closer to 24 months). Any observed trend indicating significant changes in valuations would require updated appraisals. Based on experience, current appraisals are discounted 9% for estimated costs associated with foreclosures and costs to sell. If a loan is evaluated for impairment under ASC Topic 310-10-35, Accounting by Creditors for Impairment of a Loan, and the appraisal is outdated, a new appraisal is ordered. If the new appraisal is not received in sufficient time to assess any required impairment to meet financial reporting obligations, the old appraisal may be adjusted to reflect values observed in similar properties. After a new appraisal is obtained, the analysis is updated to reflect the new valuation. Loan losses are charged against the allowance when management believes that the uncollectibility of a loan is confirmed. Loans, net of specific allowances for fair-value impairment, amounted to $2.0 million and $11.4 million as of June 30, 2014 and December 31, 2013, respectively. This valuation was derived using Level 3 inputs, consisting of appraisals of underlying collateral and discounted cash flow analysis. Foreclosed Assets Estimates of fair values for foreclosed assets are determined based on a variety of information, including the use of available appraisals, estimates of market value by licensed appraisers or local real estate brokers and the knowledge and experience of the Company’s management related to the assessment of the values of foreclosed properties. Management takes into consideration the type, location and occupancy of the property, as well as current economic conditions in the area in which the property is located, in assessing estimates of fair value. The fair value of a foreclosed asset, upon initial recognition, is estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria and/or market data. Foreclosed assets measured at fair value upon initial recognition totaled $0.8 million and $0.5 million (utilizing Level 3 valuation inputs) as of June 30, 2014 and December 31, 2013, respectively. In connection with the measurement and initial recognition of the foregoing foreclosed assets, the Company recognized charge-offs of the allowance for loan losses totaling approximately zero and $0.5 million as of June 30, 2014 and December 31, 2013, respectively. Other foreclosed assets totaling $1.0 million and $5.3 million (utilizing Level 3 valuation inputs) were remeasured at fair value as of June 30, 2014 and December 31, 2013, respectively. The remeasurement resulted in no impairment of other real estate owned as of June 30, 2014 and $1.3 million as of December 31, 2013. The following table presents the balances of impaired loans and foreclosed assets measured at fair value on a non-recurring basis as of June 30, 2014 and December 31, 2013.
|  | Fair Value Measurements as of June 30, 2014 Using |
|  | Totals At June 30, 2014 |  |  | Quoted Prices in Active Markets For Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
|  | (Dollars in Thousands) |
Impaired loans |  | $ | 1,983 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,983 |
Foreclosed property and other real estate |  |  | 1,866 |  |  |  | — |  |  |  | — |  |  |  | 1,866 |
|  | Fair Value Measurements as of December 31, 2013 Using |
|  | Totals At December 31, 2013 |  |  | Quoted Prices in Active Markets For Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
|  | (Dollars in Thousands) |
Impaired loans |  | $ | 11,358 |  |  | $ | — |  |  | $ | — |  |  | $ | 11,358 |
Foreclosed property and other real estate |  |  | 5,832 |  |  |  | — |  |  |  | — |  |  |  | 5,832 |
Non-Recurring Fair Value Measurements Using Significant Unobservable Inputs The following table presents information regarding assets and liabilities measured at fair value using significant unobservable inputs (Level 3) as of June 30, 2014. The table includes the valuation techniques and the significant unobservable inputs utilized. The range of each unobservable input, as well as the weighted-average within the range utilized as of June 30, 2014, are both included. Following the table is a description of the valuation technique and the sensitivity of the technique to changes in the significant unobservable input.
|  | Level 3 Significant Unobservable Input Assumptions
|  | Fair Value June 30, 2014 |  |  | Valuation Technique |  | Unobservable Input |  | Quantitative Range of Unobservable Inputs (Weighted- Average)
|  | (Dollars in Thousands)
Non-recurring fair value measurements: |  |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | 1,983 |  |  | Multiple data points, including discount to appraised value of collateral based on recent market activity |  | Appraisal comparability adjustment (discount) |  | 9% - 10% (9.5%)
Foreclosed property and other real estate |  | $ | 1,866 |  |  | Discount to appraised value of property based on recent market activity for sales of similar properties |  | Appraisal comparability adjustment (discount) |  | 9% - 10% (9.5%)
Impaired loans Impaired loans are valued based on multiple data points indicating the fair value for each loan. The primary data point for non-performing loans is the appraisal value of the underlying collateral to which a discount is applied. Management establishes this discount or comparability adjustment based on recent sales of similar property types. As liquidity in the market increases or decreases, the comparability adjustment and the resulting asset valuation are impacted. Foreclosed property and other real estate Foreclosed property and other real estate under a binding contract for sale are valued based on contract price. If no sales contract is pending for a specific property, management establishes a comparability adjustment to the appraised value based on historical activity considering proceeds for properties sold versus the corresponding appraised value. Increases or decreases in realization for properties sold impact the comparability adjustment for similar assets remaining on the balance sheet. Fair Value of Financial Instruments ASC Topic 825, Financial Instruments, requires disclosure of 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 following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Cash, due from banks and federal funds sold: The carrying amount of cash, due from banks and federal funds sold approximates fair value. Federal Home Loan Bank (“FHLB”): Based on the redemption provision of the FHLB, the stock has no quoted market value and is carried at cost. Securities: Fair values of securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on market prices of comparable instruments. Derivative instruments: The fair value of derivative agreements is based on information obtained from a third party financial institution. This information is periodically evaluated by the Company and, as necessary, corroborated against other third party information. Accrued interest receivable and payable: The carrying amount of accrued interest approximates fair value. Loans, net: For variable-rate loans, fair values are based on carrying values. Fixed-rate commercial loans, other installment loans and certain real estate mortgage loans are valued using discounted cash flows. The discount rate used to determine the present value of these loans is based on interest rates currently being charged by the Company on comparable loans as to credit risk and term. Demand and savings deposits: The fair values of demand deposits are equal to the carrying value of such deposits. Demand deposits include non-interest bearing demand deposits, savings accounts, NOW accounts and money market demand accounts. Time deposits: The fair values of relatively short-term time deposits are equal to their carrying values. Discounted cash flows are used to value long-term time deposits. The discount rate used is based on interest rates currently being offered by the Company on comparable deposits as to amount and term. Short-term borrowings: These borrowings may consist of federal funds purchased, securities sold under agreements to repurchase and the floating rate borrowings from the FHLB account. Due to the short-term nature of these borrowings, fair values approximate carrying values. Long-term debt: The fair value of this debt is estimated using discounted cash flows based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements as of June 30, 2014 and December 31, 2013. Off-balance sheet instruments: The carrying amount of commitments to extend credit and standby letters of credit approximates fair value. The carrying amount of the off-balance sheet financial instruments is based on fees currently charged to enter into such agreements. The estimated fair value and related carrying or notional amounts, as well as the level within the fair value hierarchy, of the Company’s financial instruments as of June 30, 2014 and December 31, 2013, were as follows:
|  | June 30, 2014 |
|  | Carrying Amount |  |  | Estimated Fair Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
|  | (Dollars in Thousands) |
Assets: |  |  |  |
Cash and cash equivalents |  | $ | 41,443 |  |  | $ | 41,443 |  |  | $ | 41,443 |  |  | $ | — |  |  | $ | — |
Investment securities available-for-sale |  |  | 169,110 |  |  |  | 169,110 |  |  |  | — |  |  |  | 169,110 |  |  |  | — |
Investment securities held-to-maturity |  |  | 40,835 |  |  |  | 40,220 |  |  |  | — |  |  |  | 40,220 |  |  |  | — |
Federal Home Loan Bank stock |  |  | 738 |  |  |  | 738 |  |  |  | — |  |  |  | — |  |  |  | 738 |
Loans, net of allowance for loan losses |  |  | 272,086 |  |  |  | 273,992 |  |  |  | — |  |  |  | — |  |  |  | 273,992 |
Other assets - derivatives |  |  | 69 |  |  |  | 69 |  |  |  | — |  |  |  | 69 |  |  |  | — |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 483,254 |  |  |  | 483,733 |  |  |  | — |  |  |  | 483,733 |  |  |  | — |
Short-term borrowings |  |  | 623 |  |  |  | 623 |  |  |  | — |  |  |  | 623 |  |  |  | — |
Long-term debt |  |  | 5,000 |  |  |  | 5,013 |  |  |  | — |  |  |  | 5,013 |  |  |  | — |
|  | December 31, 2013 |
|  | Carrying Amount |  |  | Estimated Fair Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |
|  | (Dollars in Thousands) |
Assets: |  |  |  |
Cash and cash equivalents |  | $ | 47,720 |  |  | $ | 47,720 |  |  | $ | 47,720 |  |  | $ | — |  |  | $ | — |
Investment securities available-for-sale |  |  | 135,754 |  |  |  | 135,754 |  |  |  | — |  |  |  | 135,754 |  |  |  | — |
Investment securities held-to-maturity |  |  | 35,050 |  |  |  | 33,365 |  |  |  | — |  |  |  | 33,365 |  |  |  | — |
Federal Home Loan Bank stock |  |  | 906 |  |  |  | 906 |  |  |  | — |  |  |  | — |  |  |  | 906 |
Loans, net of allowance for loan losses |  |  | 300,927 |  |  |  | 303,291 |  |  |  | — |  |  |  | — |  |  |  | 303,291 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 484,279 |  |  |  | 484,957 |  |  |  | — |  |  |  | 484,957 |  |  |  | — |
Short-term borrowings |  |  | 1,231 |  |  |  | 1,231 |  |  |  | — |  |  |  | 1,231 |  |  |  | — |
Long-term debt |  |  | 5,000 |  |  |  | 5,011 |  |  |  | — |  |  |  | 5,011 |  |  |  | — |

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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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