18. Fair Value of Financial Instruments and Interest Rate Risk

12 Months Ended

Dec. 31, 2012

Fair Value Disclosures [Abstract]

18. Fair Value of Financial Instruments and Interest Rate Risk

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value. The determination of where an asset or liability falls in the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter and based on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, we expect changes in classifications between levels will be rare.  There were no transfers between levels in 2012 or 2011.

Assets and Liabilities Measured on a Recurring Basis

Securities: Investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured 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. Level 1 securities include those traded on nationally recognized securities exchanges, U.S. Treasury securities, and money market funds. Level 2 securities include U.S. Agency securities, mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Deferred compensation plans: Liabilities associated with deferred compensation plans are recorded at fair value on a recurring basis as Level 1 based on the fair value of the underlying securities. The underlying securities are all Level 1 as described above.

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 and 2011 are summarized below.

			Fair Value Measurements at
			December 31, 2012
			Using
			Level 1		Level 2		Level 3
	Total		(Quoted Prices)		(Significant Other Observable Inputs)		(Significant Unobservable Inputs)
Investment securities available-for-sale
U.S. Treasuries	$	20,000	$	20,000	$	-	$	-
U. S. Government agencies		249,496		-		249,496		-
State and municipals		148,666		-		148,666		-
Corporate bonds		1,852		-		1,852		-
Collateralized mortgage obligations		5,333		-		5,333		-
Mortgage backed securities		113,380		-		113,380		-
Other investments		14,749		-		14,749		-
Other assets 1		2,987		2,987		-		-
Total assets at fair value	$	556,463	$	22,987	$	533,476	$	-
Cash flow hedge	$	1,465	$	-	$	1,465	$	-
Other liabilities 1		3,034		3,034		-		-
Total liabilities at fair value	$	4,499	$	3,034	$	1,465	$	-

1 Includes assets and liabilities associated with deferred compensation plans

			Fair Value Measurements at
			December 31, 2011
			Using
			Level 1		Level 2		Level 3
	Total		(Quoted Prices)		(Significant Other Observable Inputs)		(Significant Unobservable Inputs)
Investment securities available-for-sale
U. S. Government agencies	$	152,467	$	-	$	152,467	$	-
State and municipals		159,515		-		159,515		-
Corporate bonds		4,618		-		4,618		-
Collateralized mortgage obligations		7,472		-		7,472		-
Agency mortgage backed securities		144,893		-		144,893		-
Certificates of deposit		8,999		-		8,999		-
Other assets 1		2,711		2,711		-		-
Total assets at fair value	$	480,675	$	2,711	$	477,964	$	-
Cash flow hedge	$	804	$	-	$	804	$	-
Other liabilities 1		2,711		2,711		-		-
Total liabilities at fair value	$	3,515	$	2,711	$	804	$	-

1 Includes assets and liabilities associated with deferred compensation plans

The change in the balance sheet carrying values associated with company determined market priced assets measured at fair value on a recurring basis during the twelve months ended December 31, 2012 was not significant and there were no transfers between Levels 1, 2 or 3 during the year.  We had no recurring level 3 assets or liabilities at any time during 2012 or 2011.

Assets and Liabilities Measured on a Nonrecurring Basis

We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with USGAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period.

Loans held for sale: The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices.  Those loans with a quoted price are recorded as Level 2. If no such quoted price exists, the fair value of a loan is determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that loan. These loans are recorded as Level 3.

Loans: We do not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired.

The fair value of impaired loans is estimated using one of several methods.  For real estate secured loans, generally external appraisals by a board approved appraiser are used to determine the fair value of the underlying collateral for collateral dependent impaired loans.  These appraisals are sometimes adjusted based on management’s and Chief Appraiser’s knowledge of other factors not embedded within the appraisal, including selling costs, maintenance costs, and other estimable costs that would be incurred if collateral is required to be liquidated.  Our in-house Chief Appraiser’s review of such appraisals is documented as part of the quarterly ALLL process.  Other estimates of value, such as auctioneer’s estimates of value, purchase offers and/or contracts, and settlement offers and/or agreements, may be used when they are thought to represent a more accurate estimate of fair value.  For loans that are not secured by real estate, fair value of the collateral may be determined by discounted book value based on available data such as current financial statements or an external appraisal or an auctioneer’s or liquidator’s estimate of value.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2012 and 2011, substantially all of the total impaired loans were evaluated based on the fair value of the collateral.  Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. As such, we record the impaired loan as nonrecurring Level 3.

Foreclosed assets: Foreclosed assets are initially recorded at fair value less costs to sell upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or net realizable value. Fair value is based upon appraised values of the collateral adjusted for estimated disposition costs or management’s estimation of the value of the collateral. As such, we record the foreclosed asset as nonrecurring Level 3.

Assets measured at fair value on a nonrecurring basis as of December 31, 2012 and 2011 are included in the table below:

			Fair Value Measurements at
			December 31, 2012
			Using
	Total		Level 1		Level 2		Level 3
	Total		(Quoted Prices)		(Significant Other Observable Inputs)		(Significant Unobservable Inputs)
Impaired loans	$	49,292	$	-	$	-	$	49,292
Loans held for sale - mortgage		37,777		-		37,777		-
Foreclosed assets		5,760		-		-		5,760
Total assets at fair value	$	92,829	$	-	$	37,777	$	55,052
			Fair Value Measurements at
			December 31, 2011
			Using
	Total		Level 1		Level 2		Level 3
	Total		(Quoted Prices)		(Significant Other Observable Inputs)		(Significant Unobservable Inputs)
Impaired loans	$	52,756	$	-	$	-	$	52,756
Loans held for sale - mortgage		42,027		-		42,027		-
Loans held for sale - other assets		213		-		-		213
Foreclosed assets		8,575		-		-		8,575
Total assets at fair value	$	103,571	$	-	$	42,027	$	61,544

The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The estimated fair value approximates carrying value for cash and cash equivalents, accrued interest and the cash surrender value of life insurance policies. The methodologies for other financial assets and financial liabilities are discussed below:

Loans: For variable-rate loans that re-price frequently and with no significant changes in credit risk, fair values are based on carrying values.  The fair values for other loans were estimated using discounted cash flow analyses, using interest rates currently being offered.  An overall valuation adjustment is made for specific credit risks as well as general portfolio credit risk.  These loans are considered Level 3, as the valuation is determined using discounted cash flow methodology.

Deposit Liabilities: The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date.  The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.  Deposits are considered Level 3, as the valuation is determined using discounted cash flow methodology.

Federal Home Loan Bank Advances: The fair values of our Federal Home Loan Bank advances are provided by the Federal Home Loan Bank of Atlanta and represent mathematical approximations of market values derived from their proprietary models as of the close of business on the last business day of the quarter and therefore,   we consider these advances Level 3.

Subordinated Debt: The values of our subordinated debt are variable rate instruments that re-price on a quarterly basis; therefore, carrying value is adjusted for the three month re-pricing lag in order to approximate fair value.  Subordinated debt is Level 3, as the valuation is determined using discounted cash flow methodology.

Off-Balance-Sheet Financial Instruments: The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.  For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.  The fair value of stand-by 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, 2012 and 2011, the fair value of loan commitments and stand-by letters of credit was immaterial.

The estimated fair values of our financial instruments at December 31 are as follows:

	2012				2011
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	$	89,949		89,949	$	99,970	$	99,970
Investment securities		553,476		553,476		477,964		477,964
Mortgage loans held for sale		37,778		37,778		42,027		42,027
Loans, net		2,049,769		1,884,523		1,998,842		1,839,635
Accrued interest receivable		8,265		8,265		8,908		8,908
Financial liabilities:
Deposits	$	2,484,324		2,497,277	$	2,395,600	$	2,409,959
Federal Home Loan Bank advances		55,000		59,864		60,000		64,395
Subordinated debt		32,991		32,937		32,991		32,930
Accrued interest payable		1,682		1,682		2,122		2,122