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Fair Value of Financial Instruments - (As Restated)
12 Months Ended
Dec. 31, 2015
Fair Value of Financial Instruments - (As Restated) [Abstract]  
Fair Value of Financial Instruments - (As Restated)

25.Fair Value of Financial Instruments – (As Restated)

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. 



The 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.  Transfers in and out of Level 1, 2 or 3 are recorded at fair value at the beginning of the reporting period.



Management believes that the Corporation’s 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.  The following valuation techniques were used to measure the fair value of assets in the table below which are measured on a recurring and non-recurring basis as of December 31, 2015.



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 December 31, 2015, the U.S. Government agencies and treasuries, residential and commercial mortgage-backed securities, private label residential 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 we have 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 December 31, 2015, the Corporation owned 12 pooled trust preferred securities with an amortized cost of $29.3 million and a fair value of $22.2 million. The market for these securities at December 31, 2015 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 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 (i) the few observable transactions and market quotations that are available are not reliable for the purpose of obtaining fair value at December 31, 2015, (ii) 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 (iii) 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 other-than-temporary impairment as well as the fair value determinations for its CDO portfolio. Management does not believe that there were any material differences in the impairment evaluations and pricing between December 31, 2015 and December 31, 2014.



The approach of 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.  Management does not believe that there is a significant concentration with the counterparty.



Impaired loans – Loans included in the table below are those that are considered impaired with a specific allocation 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 – Fair value of other real estate owned was 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 December 31, 2015 and 2014, the significant unobservable inputs used in the fair value measurements were as follows:





 

 

 

 

 

(in thousands)

 

Fair Value at December 31, 2015

Valuation Technique

Significant Unobservable Inputs

Significant Unobservable Input Value

Recurring:

 

 

 

 

 



 

 

 

 

 

Investment Securities – available for sale - CDO

$

22,211 

Discounted Cash Flow

Discount Rate

Range of Libor+ 4.5% to 5.5%

Cash Flow Hedge

$

(66)

Discounted Cash Flow

Reuters Third Party Market Quote

99.9%                      (weighted avg 99.9%)



 

 

 

 

 

Non-recurring:

 

 

 

 

 



 

 

 

 

 

Impaired Loans

$

6,247 

Market Comparable Properties

Marketability Discount

3% to 15% (1)                                    (weighted avg 11.3%)



 

 

 

 

 

OREO

$

4,133 

Market Comparable Properties

Marketability Discount

10% to 15% (1)                (weighted avg 12.5%)







 

 

 

 

 

(in thousands)

 

Fair Value at December 31, 2014

Valuation Technique

Significant Unobservable Inputs

Significant Unobservable Input Value

Recurring:

 

 

 

 

 



 

 

 

 

 

Investment Securities – available for sale - CDO

$

25,339 

Discounted Cash Flow

Discount Rate

Range of Libor+ 5% to 12%

Cash Flow Hedge

$

(199)

Discounted Cash Flow

Reuters Third Party Market Quote

99.9%                      (weighted avg 99.9%)



 

 

 

 

 

Non-recurring:

 

 

 

 

 



 

 

 

 

 

Impaired Loans

$

9,122 

Market Comparable Properties

Marketability Discount

10% (1)                                    (weighted avg 10%)



 

 

 

 

 

OREO

$

2,511 

Market Comparable Properties

Marketability Discount

10% to 15% (1)                (weighted avg 11%)



(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 December 31, 2015 and 2014 are as follows:







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

Fair Value Measurements at



 

 

 

December 31, 2015 Using



 

 

 

(In Thousands)



Assets Measured at

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Unobservable Inputs

Description

12/31/2015

(Level 1)

(Level 2)

(Level 3)

Recurring:

 

 

 

 

 

 

 

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

   U.S. government agencies

$

33,964 

 

 

$

33,964 

 

 

   Residential mortgage-backed agencies

$

14,170 

 

 

$

14,170 

 

 

   Commercial mortgage-backed agencies

$

43,636 

 

 

$

43,636 

 

 

   Collateralized mortgage obligations

$

9,610 

 

 

$

9,610 

 

 

   Obligations of states and political subdivisions

$

46,641 

 

 

$

46,641 

 

 

   Collateralized debt obligations

$

22,211 

 

 

 

 

$

22,211 

Financial Derivative

$

(66)

 

 

 

 

$

(66)

Non-recurring:

 

 

 

 

 

 

 

 

Impaired loans

$

6,247 

 

 

 

 

$

6,247 

Other real estate owned

$

4,133 

 

 

 

 

$

4,133 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

Fair Value Measurements at



 

 

 

December 31, 2014 Using



 

 

 

(In Thousands)



 

Assets Measured at

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Unobservable Inputs

Description

12/31/2014

(Level 1)

(Level 2)

(Level 3)

Recurring:

 

 

 

 

 

 

 

 

Investment securities available-for-sale:

 

 

 

 

 

 

 

 

   U.S. treasuries

 

$

29,596 

 

 

$

29,596 

 

 

   U.S. government agencies

$

38,941 

 

 

$

38,941 

 

 

   Residential mortgage-backed agencies

$

45,273 

 

 

$

45,273 

 

 

   Commercial mortgage-backed agencies

$

25,957 

 

 

$

25,957 

 

 

   Collateralized mortgage obligations

$

8,707 

 

 

$

8,707 

 

 

   Obligations of states and political subdivisions

$

47,304 

 

 

$

47,304 

 

 

   Collateralized debt obligations

$

25,339 

 

 

 

 

$

25,339 

Financial Derivative

$

(199)

 

 

 

 

$

(199)

Non-recurring:

 

 

 

 

 

 

 

 

Impaired loans

$

9,122 

 

 

 

 

$

9,122 

Other real estate owned

$

2,511 

 

 

 

 

$

2,511 



There were no transfers of assets between any of the levels of the fair value hierarchy for the years ended December 31, 2015 or December 31, 2014.

The following tables show a reconciliation of the beginning and ending balances for fair valued assets measured using Level 3 significant unobservable inputs for the years ended December 31, 2015 and 2014:





 

 

 

 



 

 

 

 



 

Fair Value Measurements Using Significant



 

Unobservable Inputs



 

(Level 3)



 

(In Thousands)



Investment Securities Available for Sale

Cash Flow Hedge

Beginning balance January 1, 2015

$

25,339 

$

(199)

   Total gains/(losses) realized/unrealized:

 

 

 

 

       Included in earnings     

 

818 

 

       Included in other comprehensive income

 

(3,946)

 

133 

Ending balance December 31, 2015

$

22,211 

$

(66)



 

 

 

 

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

$

$



 

 

 

 



 

 

 

 



 

Fair Value Measurements Using Significant



 

Unobservable Inputs



 

(Level 3)



 

(In Thousands)



 

Cash Flow Hedge

Beginning balance January 1, 2014

 

17,538 

$

(457)

   Total gains/(losses) realized/unrealized:

 

 

 

 

       Included in earnings     

 

 

       Included in other comprehensive income

 

7,801 

 

258 

Ending balance December 31, 2014

 

25,339 

$

(199)



 

 

 

 

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

 

$



Gains and losses (realized and unrealized) included in earnings for the periods above are reported in the Consolidated Statement of Income in other operating income.



The fair values disclosed 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.



We use the following methods and assumptions in estimating 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.



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 reprice 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 reprice 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.



Short-term borrowings:  The carrying amount of short-term borrowings approximates their fair values.



Borrowed funds: The fair value of the Bank’s FHLB borrowings and First United Corporation’s TPS Debentures 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 table presents fair value information about financial instruments, whether or not recognized in the 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 statement of financial condition are as follows:





 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



December 31, 2015

 

Fair Value Measurements



 

 

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Unobservable Inputs

(in thousands)

Carrying Amount

Fair Value

(Level 1)

(Level 2)

(Level 3)

Financial Assets:

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

$

50,188 

$

50,188 

$

50,188 

 

 

 

 

Interest bearing deposits in banks

 

1,953 

 

1,953 

 

1,953 

 

 

 

 

Investment securities - AFS

 

170,232 

 

170,232 

 

 

$

148,021 

$

22,211 

Investment securities - HTM

 

105,560 

 

106,742 

 

 

 

103,779 

 

2,963 

Restricted Bank stock

 

5,904 

 

5,904 

 

 

 

5,904 

 

 

Loans, net

 

867,101 

 

872,991 

 

 

 

 

 

872,991 

Accrued interest receivable

 

4,218 

 

4,218 

 

 

 

4,218 

 

 



 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

Deposits – non-maturity

 

744,219 

 

744,219 

 

 

 

744,219 

 

 

Deposits – time deposits

 

254,575 

 

258,267 

 

 

 

258,267 

 

 

Short-term borrowed funds

 

35,828 

 

35,828 

 

 

 

35,828 

 

 

Long-term borrowed funds

 

147,537 

 

151,562 

 

 

 

151,562 

 

 

Accrued interest payable

 

478 

 

478 

 

 

 

478 

 

 

Financial derivative

 

66 

 

66 

 

 

 

 

 

66 

Off balance sheet financial instruments

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 

 

 



December 31, 2014

 

Fair Value Measurements



 

 

 

Quoted Prices in Active Markets for Identical Assets

 

Significant Other Observable Inputs

 

Significant Unobservable Inputs

(In thousands)

Carrying Amount

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Financial Assets:

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

$

27,554 

$

27,554 

$

27,554 

 

 

 

 

Interest bearing deposits in banks

 

7,897 

 

7,897 

 

7,897 

 

 

 

 

Investment securities - AFS

 

221,117 

 

221,117 

 

 

$

195,778 

$

25,339 

Investment securities - HTM

 

109,449 

 

110,771 

 

 

 

108,163 

 

2,608 

Restricted Bank stock

 

7,524 

 

7,524 

 

 

 

7,524 

 

 

Loans, net

 

827,926 

 

830,904 

 

 

 

 

 

830,904 

Accrued interest receivable

 

4,152 

 

4,152 

 

 

 

4,152 

 

 



 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

Deposits – non-maturity

 

689,581 

 

689,581 

 

 

 

689,581 

 

 

Deposits – time deposits

 

291,742 

 

296,713 

 

 

 

296,713 

 

 

Short-term borrowed funds

 

39,801 

 

39,801 

 

 

 

39,801 

 

 

Long-term borrowed funds

 

182,606 

 

187,143 

 

 

 

187,143 

 

 

Accrued interest payable

 

882 

 

882 

 

 

 

882 

 

 

Financial derivative

 

199 

 

199 

 

 

 

 

 

199 

Off balance sheet financial instruments