29. Fair Value of Financial Instruments

ASC 820, Fair Value Measurements and Disclosures, clarifies the principle that fair value should be based on the assumptions that 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.

A description of the valuation methodologies used for instruments measured at fair value follows, as well as the classification of such instruments within the valuation hierarchy.

Securities are classified within Level 1 when quoted market prices are available in an active market. Inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are unavailable, fair value is estimated using pricing models or quoted prices of securities with similar characteristics, at which point the securities would be classified within Level 2 of the hierarchy. Examples include certain available for sale securities. The Company’s investment portfolio did not include Level 3 securities as of December 31, 2013 and December 31, 2012.

The Company has segregated all financial assets and liabilities that are measured at fair value on a recurring 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 tables below (in thousands):


			December 31, 2013
			Fair Value Measurement Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Available for sale securities	$	277,719	$	—	$	277,719	$	—
Derivative instruments		1,157		—		1,157	$	—

Total	$	278,876	$	—	$	278,876	$	—

Liabilities
Derivative instruments	$	4,317	$	—	$	4,317	$	—


			December 31, 2012
			Fair Value Measurement Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Available for sale securities	$	405,355	$	—	$	405,355	$	—

Liabilities
Derivative instruments	$	6,854	$	—	$	6,854	$	—

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 tables below (in thousands):


			December 31, 2013
			Fair Value Measurement Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Loans	$	9,782	$	—	$	—	$	9,782
OREO		2,390		—		—		2,390

	$	12,172	$	—	$	—	$	12,172

			December 31, 2012
			Fair Value Measurement Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Loans	$	21,313	$	—	$	—	$	21,313
OREO		5,434		—		—		5,434

	$	26,747	$	—	$	—	$	26,747

In accordance with ASC Topic 310, the Company records loans and other real estate considered impaired at the lower of cost or fair value. Impaired loans, recorded at fair value, are Level 3 assets measured using appraisals from external parties of the collateral, less any prior liens primarily using the market or income approach.

The Company did not record any liabilities at fair value for which measurement of the fair value was made on a nonrecurring basis during the years ended December 31, 2013 and December 31, 2012.

ASC 820 requires the disclosure of the fair value for 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 nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

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

Cash and Cash Equivalents and Short-Term Investments

The carrying amounts of these short-term instruments approximate their fair values.

Investment in Short-Term Receivables

The carrying amounts of these short-term receivables approximate their fair values.

Investment Securities

Securities are classified within Level 1 where quoted market prices are available in the active market. If quoted market prices are unavailable, fair value is estimated using pricing models or quoted prices of securities with similar characteristics, at which point the securities would be classified within Level 2 of the hierarchy. Inputs include securities that have quoted prices in active markets for identical assets.

Loans

For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for fixed-rate commercial real estate, commercial loans, and consumer loans are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms and borrowers of similar credit quality. Fair value of mortgage loans held for sale is based on commitments on hand from investors or prevailing market rates. The fair value associated with the loans includes estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows, which would be classified as Level 3 of the hierarchy.

Bank-Owned Life Insurance

The carrying amounts of the bank-owned life insurance policies are recorded at cash surrender value, which approximate their fair values.

Deposits

The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts approximate their fair values at the reporting date. 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. The fair value of the Company’s deposits would, therefore, be categorized within Level 3 of the fair value hierarchy.

Short-Term Borrowings and Repurchase Agreements

The carrying amounts of these short-term instruments approximate their fair values.

Long-Term Borrowings

The fair values of long-term borrowings are estimated using discounted cash flows analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The fair value of the Company’s long-term debt would, therefore, be categorized within Level 3 of the fair value hierarchy.

Derivative Instruments

Fair values for interest rate swap agreements are based upon the amounts required to settle the contracts. The derivative instruments are classified within Level 2 of the fair value hierarchy.

The estimated fair values of the Company’s financial instruments were as follows as of the dates indicated (in thousands):

Fair Value Measurements at December 31, 2013

Carrying
Amount

Total

Level 1

Level 2

Level 3

Financial Assets:

Cash and due from banks

28,140

—

Short-term investments

3,502

—

Investment in short-term receivables

246,817

Investment securities available for sale

277,719

—

277,719

—

Investment securities held to maturity

94,904

90,966

Loans and loans held for sale

2,364,354

2,344,475

—

2,344,475

Cash surrender value of bank-owned life insurance

26,187

—

26,187

—

Derivative instruments

1,157

—

1,157

—

Financial Liabilities:

Deposits, noninterest-bearing

291,080

—

291,080

—

Deposits, interest-bearing

2,439,727

2,380,985

—

2,380,985

Short-term borrowings and repurchase agreements

84,382

—

84,382

—

Long-term borrowings

55,110

55,616

—

55,616

Derivative instruments

4,317

—

4,317

—


	Fair Value Measurements at December 31, 2012
	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	26,471	$	26,471	$	26,471	$	—	$	—
Short-term investments		9,541		9,541		9,541		—		—
Investment in short-term receivables		81,044		81,044		81,044
Investment securities available for sale		405,355		405,355		—		405,355		—
Loans and loans held for sale		1,948,077		1,939,622		—		—		1,939,622
Cash surrender value of bank-owned life insurance		25,506		25,506		—		25,506		—
Financial Liabilities:
Deposits, noninterest-bearing		239,538		239,538		—		239,538		—
Deposits, interest-bearing		2,028,990		2,035,696		—		—		2,035,696
Short-term borrowings and repurchase agreements		58,087		58,087		—		58,087		—
Long-term borrowings		75,220		77,870		—		—		77,870
Derivative instruments		6,854		6,854		—		6,854		—