Fair Value Measurements

12 Months Ended

Dec. 31, 2013

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 19 – Fair Value Measurements

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the fair value measurements and disclosures topic of FASB ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured 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.

Level 1 – Valuation is based on quoted prices in active markets for identical assets and liabilities.

Level 2 – Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Level 3 – Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).

In connection with the merger, the Company acquired a corporate bond, a trust preferred security, with a par value of $500,000. There was no readily determinable market value for this security. The Company acquired an outside appraisal of the security and recorded it in connection with the merger at approximately 62% of par value. The security has consistently performed and was the only security recorded with a Level 3 valuation at December 31, 2012. This security was sold in the first quarter of 2013.

In mid-2013, the Company purchased $1,000,000 in convertible preferred stock from a Virginia based, publicly traded community bank. There is no secondary market for this bank's preferred stock; however its common stock is traded on a limited basis in the over the counter market. The Company uses an independent third party to assist in the valuation of these securities.  Given the convertible nature of the securities, the common stock of the issuing community bank is used as a proxy for the preferred stock value.  This is the only security recorded with a Level 3 valuation at December 31, 2013.

The following table presents the balances of financial assets measured at fair value on a recurring basis during the period (in thousands):

				Fair Value Measurements at December 31, 2013 Using
	Balance as of December 31,			Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
Description	2013			Level 1			Level 2			Level 3
Assets:
Securities available for sale:
Federal agencies and GSEs		$	65,881		$	-		$	65,881		$	-
Mortgage-backed and CMOs			69,608			-			69,608			-
State and municipal			198,733			-			198,733			-
Corporate			10,799			-			10,799			-
Equity securities			1,103			-			-			1,103
Total		$	346,124		$	-		$	345,021		$	1,103

				Fair Value Measurements at December 31, 2012 Using
	Balance as of December 31,			Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
Description	2012			Level 1			Level 2			Level 3
Assets:
Securities available for sale:
Federal agencies and GSEs		$	42,759		$	-		$	42,759		$	-
Mortgage-backed and CMOs			83,308			-			83,308			-
State and municipal			202,731			2,110			200,621			-
Corporate			6,448			-			6,097			351
Total		$	335,246		$	2,110		$	332,785		$	351

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Balances as of January 1, 2013			Total Realized / Unrealized Gains (Losses) Included in						Purchases, Sales, Issuances and Settlements, Net				Transfer In (Out) of Level 3			Balances as of December 31, 2013
				Net Income			Other Comprehensive Income
Securities available for sale:
Corporate		$	351		$	136		$	-		$	(487	)		$	-		$	-
Equity			-			-			103			1,000				-			1,103
Total assets		$	351		$	136		$	103		$	513			$	-		$	1,103

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

Loans held for sale: Loans held for sale are carried at estimated fair value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the years ended December 31, 2013 and 2012. Gains and losses on the sale of loans are recorded within income from mortgage banking on the Consolidated Statements of Income.

Impaired loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected.  The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral.  Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable.  The vast majority of the Company's collateral is real estate.  The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal, of one year or less, conducted by an independent, licensed appraiser using observable market data (Level 2).  However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than one year old and not solely based on observable market comparable or management determines the fair value of the collateral is further impaired below the appraised value, then a Level 3 valuation is considered to measure the fair value.  The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business's financial statements if not considered significant using observable market data.  Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).  Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis.  Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

Other real estate owned:  Measurement for fair values for other real estate owned are the same as impaired loans.  Any fair value adjustments are recorded in the period incurred as a valuation allowance against other real estate owned with the associated expense included in foreclosed real estate expense on the Consolidated Statements of Income.

The following table summarizes the Company's assets that were measured at fair value on a nonrecurring basis during the period (in thousands):

				Fair Value Measurements at December 31, 2013 Using
	Balance as of December 31,			Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
Description	2013			Level 1			Level 2			Level 3
Assets:
Loans held for sale		$	2,760		$	-		$	2,760		$	-
Impaired loans, net of valuation allowance			3,193			-			-			3,193
Other real estate owned			3,422			-			-			3,422

				Fair Value Measurements at December 31, 2012 Using
	Balance as of December 31,			Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
Description	2012			Level 1			Level 2			Level 3
Assets:
Loans held for sale		$	13,852		$	-		$	13,852		$	-
Impaired loans, net of valuation allowance			3			-			-			3
Other real estate owned			6,193			-			-			6,193

     Quantitative Information About Level 3 Fair Value Measurements as of  December 31, 2013:

Assets	Valuation Technique	Unobservable Input	Weighted Rate
Securities available for sale	Discounted cash flow analysis	Discount rate	11%
Impaired loans	Discounted appraised value	Selling cost	6%
Other real estate owned	Discounted appraised value	Selling cost	6%
Other real estate owned	Discounted appraised value	Discount for lack of marketability and age of appraisal	9%

ASC 825, "Financial Instruments," requires disclosure about fair value of financial instruments for interim periods and 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.

The carrying values and estimated fair value of the Company's financial instruments as of December 31, 2013 are as follows (in thousands):

	Fair Value Measurements at December 31, 2013 Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Fair Value Balance
			Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	67,681	$	-	$	67,681	$	-	$	67,681
Securities available for sale		346,124		-		345,021		1,103		346,124
Restricted stock		4,889		-		4,889		-		4,889
Loans held for sale		2,760		-		2,760		-		2,760
Loans, net of allowance		782,071		-		-		783,825		783,825
Bank owned life insurance		14,746		-		14,746		-		14,746
Accrued interest receivable		4,741		-		4,741		-		4,741
Financial Liabilities:
Deposits	$	1,057,675	$	-	$	668,077	$	392,991	$	1,061,068
Repurchase agreements		39,478		-		39,478		-		39,478
Other borrowings		9,951		-		-		10,560		10,560
Trust preferred capital notes		27,419		-		-		18,162		18,162
Accrued interest payable		610		-		610		-		610

The carrying values and estimated fair values of the Company's financial instruments at December 31, 2012 are as follows (in thousands):

	Fair Value Measurements at December 31, 2012 Using
	Carrying Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Fair Value Balance
			Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	47,442	$	-	$	47,442	$	-	$	47,442
Securities available for sale		335,246		2,110		332,785		351		335,246
Restricted stock		5,287		-		5,287		-		5,287
Loans held for sale		13,852		-		13,852		-		13,852
Loans, net of allowance		776,587		-		-		777,761		777,761
Bank owned life insurance		14,289		-		14,289		-		14,289
Accrued interest receivable		4,711		-		4,711		-		4,711
Financial Liabilities:
Deposits	$	1,027,667	$	-	$	618,099	$	424,378	$	1,042,477
Repurchase agreements		49,942		-		49,942		-		49,942
Other borrowings		10,079		-		-		11,062		11,062
Trust preferred capital notes		27,317		-		-		22,524		22,524
Accrued interest payable		755		-		755		-		755

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

Cash and cash equivalents.  The carrying amount is a reasonable estimate of fair value.

Securities.  Fair values are based on quoted market prices or dealer quotes.

Restricted stock.  The carrying value of restricted stock approximates fair value based on the redemption provisions of the respective entity.

Loans held for sale.  The carrying amount is a reasonable estimate of fair value.

Loans.  For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.  Fair values for fixed-rate loans are estimated based upon discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.  Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Bank owned life insurance. Bank owned life insurance represents insurance policies on officers, directors, and past directors of the Company.  The cash value of the policies are estimates using information provided by insurance carriers.  These policies are carried at their cash surrender value, which approximates the fair value.

Accrued interest receivable.  The carrying amount is a reasonable estimate of fair value.

Deposits.  The fair value of demand deposits, savings deposits, and money market deposits equals the carrying value. The fair value of fixed-rate certificates of deposit is estimated by discounting the future cash flows using the current rates at which similar deposit instruments would be offered to depositors for the same remaining maturities.

Repurchase agreements.  The carrying amount is a reasonable estimate of fair value.

Other borrowings.  The fair values of other borrowings are estimated using discounted cash flow analyses based on the interest rates for similar types of borrowing arrangements.

Trust preferred capital notes.  Fair value is calculated by discounting the future cash flows using the estimated current interest rates at which similar securities would be issued.

Accrued interest payable.  The carrying amount is a reasonable estimate of fair value.

Off-balance sheet instruments.  The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.  At December 31, 2013 and 2012, the fair value of off balance sheet instruments was deemed immaterial, and therefore was not included in the table above.  The various off-balance sheet instruments were discussed in Note 16.

The Company assumes interest rate risk (the risk that interest rates will change) in its normal operations.  As a result, the fair values of the Company's financial instruments will change when interest rates change and that change may be either favorable or unfavorable to the Company.