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FAIR VALUE DISCLOSURES
12 Months Ended
Dec. 31, 2014
Fair Value Disclosures [Abstract]  
FAIR VALUE DISCLOSURES
FAIR VALUE DISCLOSURES
The Company meets the requirements for disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. 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. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
Fair value measurements under GAAP defines fair value, describes a framework for measuring fair value and requires disclosures about fair value measurements by establishing a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to valuation techniques that employ unobservable inputs (Level 3). If the inputs used to measure the assets or liabilities fall within different levels of the hierarchy, the classification is based on the lowest level input that is significant to the fair value measurement of the asset or liability. Classification of assets and liabilities within the hierarchy considers the markets in which the assets and liabilities are traded and the reliability and transparency of the assumptions used to determine fair value.
The three levels are defined as follows: Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market for the asset or liability, for substantially the full term of the financial instrument. Level 3 – the valuation methodology is derived from model-based techniques in which at least one significant input is unobservable to the fair value measurement and based on the Company’s own assumptions about market participants’ assumptions.
Following is a description of the valuation methodologies used for instruments measured on a recurring basis at estimated fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:
Securities
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, securities are classified within Level 2 and fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. All of the Company’s securities are classified as available for sale.
The Company had no fair value liabilities measured on a recurring basis at December 31, 2014 or 2013. A summary of assets at December 31, 2014 and 2013, measured at estimated fair value on a recurring basis were as follows:
 
(Dollars in Thousands)
Level 1
 
Level 2
 
Level 3
 
Total Fair
Value
Measurements
December 31, 2014
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
U.S. Government Agencies
$
0

 
$
23,958

 
$
0

 
$
23,958

States and political subdivisions
0

 
52,401

 
0

 
52,401

GSE residential mortgage-backed securities
0

 
175,596

 
0

 
175,596

GSE residential collateralized mortgage obligations (CMOs)
0

 
58,705

 
0

 
58,705

GSE commercial CMOs
0

 
65,472

 
0

 
65,472

Total debt securities
0

 
376,132

 
0

 
376,132

Equity securities – financial services
0

 
67

 
0

 
67

Total securities
$
0

 
$
376,199

 
$
0

 
$
376,199

December 31, 2013
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
U.S. Government Agencies
$
0

 
$
25,451

 
$
0

 
$
25,451

U.S. Government Sponsored Enterprises (GSE)
0

 
13,714

 
0

 
13,714

States and political subdivisions
0

 
71,544

 
0

 
71,544

GSE residential mortgage-backed securities
0

 
198,619

 
0

 
198,619

GSE residential collateralized mortgage obligations (CMOs)
0

 
40,532

 
0

 
40,532

GSE commercial CMOs
0

 
57,014

 
0

 
57,014

Total debt securities
0

 
406,874

 
0

 
406,874

Equity securities – financial services
0

 
69

 
0

 
69

Total securities
$
0

 
$
406,943

 
$
0

 
$
406,943


Certain financial 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 financial assets recorded at fair value on a nonrecurring basis in the financial statements:
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 agreement, will not be collected. The measurement of loss associated with impaired loans for all loan classes can be based on either the observable market price of the loan, the fair value of the collateral, or discounted cash flows based on a market rate of interest for performing troubled debt restructurings. For collateral dependent loans, fair value is measured based on the value of the collateral securing the loan, less estimated costs to sell. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The value of the real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction, or if management adjusts the appraisal value, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal, if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). For discounted cash flow impairment measurement on residential mortgage loans, the Company discounts cash flows on a particular credit, utilizing a market rate of interest that adequately reflects the terms and conditions of the note, and the credit risk associated with it. Impaired loans with an allocation 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 statement of operations. Specific allocations to the allowance for loan losses or partial charge-offs were $4,352,000 and $3,238,000 at December 31, 2014 and 2013.
Foreclosed Real Estate
Other real estate property acquired through foreclosure is initially recorded at fair value of the property at the transfer date less estimated selling cost. Subsequently, other real estate owned is carried at the lower of its carrying value or the fair value less estimated selling cost. Fair value is usually determined based upon an independent third-party appraisal of the property or occasionally upon a recent sales offer. Specific charges to value the real estate owned at the lower of cost or fair value on properties held at December 31, 2014 and 2013 was $581,000 and $411,000.
A summary of assets at December 31 measured at fair value on a nonrecurring basis is as follows:
(Dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
Measurements
December 31, 2014
 
 
 
 
 
 
 
Impaired Loans
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
Owner-occupied
$
0

 
$
0

 
$
1,228

 
$
1,228

Non-owner occupied
0

 
0

 
192

 
192

Multi-family
0

 
0

 
92

 
92

Non-owner occupied residential
0

 
0

 
937

 
937

Acquisition and development:
 
 
 
 
 
 
 
Commercial and land development
0

 
0

 
117

 
117

Commercial and industrial
0

 
0

 
29

 
29

Residential mortgage:
 
 
 
 
 
 
 
First lien
0

 
0

 
2,022

 
2,022

Home equity - Lines of credit
0

 
0

 
229

 
229

Installment and other loans
0

 
0

 
13

 
13

Total impaired loans
$
0

 
$
0

 
$
4,859

 
$
4,859

 
 
 
 
 
 
 
 
Foreclosed real estate
 
 
 
 
 
 
 
Residential
$
0

 
$
0

 
$
217

 
$
217

Commercial and land development
0

 
0

 
569

 
569

Total foreclosed real estate
$
0

 
$
0

 
$
786

 
$
786

December 31, 2013
 
 
 
 
 
 
 
Impaired loans
 
 
 
 
 
 
 
Commercial real estate:
 
 
 
 
 
 
 
Owner-occupied
$
0

 
$
0

 
$
1,031

 
$
1,031

Non-owner occupied
0

 
0

 
694

 
694

Multi-family
0

 
0

 
322

 
322

Non-owner occupied residential
0

 
0

 
1,662

 
1,662

Acquisition and development:
 
 
 
 
 
 
 
Commercial and land development
0

 
0

 
51

 
51

Commercial and industrial
0

 
0

 
592

 
592

Residential mortgage:
 
 
 
 
 
 
 
First lien
0

 
0

 
599

 
599

Total impaired loans
$
0

 
$
0

 
$
4,951

 
$
4,951

 
 
 
 
 
 
 
 
Foreclosed real estate
 
 
 
 
 
 
 
Residential
$
0

 
$
0

 
$
208

 
$
208

Commercial and land development
0

 
0

 
350

 
350

Total foreclosed real estate
$
0

 
$
0

 
$
558

 
$
558


 The following table presents additional qualitative information about assets measured on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
 
 
Fair Value
Estimate
 
Valuation Techniques
 
Unobservable Input
 
Range
December 31, 2014
 
 
 
 
 
 
 
Impaired loans
$
4,859

 
Appraisal of collateral
 
Management adjustments on appraisals for property type and recent activity
 
0% - 30% discount
 
 
 
 
 
Management adjustments for liquidation expenses
 
5% - 10% discount
Foreclosed real estate
786

 
Appraisal of collateral
 
Management adjustments on appraisals for property type and recent activity
 
0% - 5% discount
 
 
 
 
 
Management adjustments for liquidation expenses
 
6% - 18% discount
December 31, 2013
 
 
 
 
 
 
 
Impaired loans
$
4,951

 
Appraisal of collateral
 
Management adjustments on appraisals for property type and recent activity
 
0% - 30% discount
 
 
 
 
 
Management adjustments for liquidation expenses
 
5% - 10% discount
Foreclosed real estate
558

 
Appraisal of collateral
 
Management adjustments on appraisals for property type and recent activity
 
0% - 30% discount
 
 
 
 
 
Management adjustments for liquidation expenses
 
5% - 10% discount

Fair values of financial instruments
In addition to those disclosed above, the following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:
Cash and Due from Banks and Interest Bearing Deposits with Banks
The carrying amounts of cash and due from banks and interest bearing deposits with banks approximate their fair value.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or fair value. These loans typically 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.
Loans Receivable
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 loans are estimated using discounted cash flow analyses, using interest rates currently being offered in the market for loans with similar terms to borrowers of similar credit quality.
Restricted Investments in Bank Stocks
These investments are carried at cost. The Company is required to maintain minimum investment balances in these stocks, which are not actively traded and therefore have no readily determinable market value.
Mortgage Servicing Rights
The fair value of mortgage servicing rights is estimated based on a valuation model that calculates the present value of estimated future net servicing income.
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 and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposits and IRAs are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market to a schedule of aggregated expected maturities on time deposits.
Short-Term Borrowings
The carrying amounts of federal funds purchased, borrowings under Repurchase Agreements, and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the Company’s current borrowing rates for similar types of borrowing arrangements.
Long-Term Debt
The fair value of the Company’s fixed rate long-term borrowings is estimated using a discounted cash flow analysis based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements. The carrying amounts of variable-rate long-term borrowings approximate their fair values at the reporting date.
Accrued Interest
The carrying amounts of accrued interest receivable and payable approximate their fair values.
Off-Balance-Sheet Instruments
The Company generally does not charge commitment fees. Fees for standby letters of credit and other off-balance-sheet instruments are not significant.
The estimated fair values of the Company’s financial instruments were as follows at December 31:
 
(Dollars in thousands)
Carrying
Amount
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
December 31, 2014
 
 
 
 
 
 
 
 
 
Financial Assets
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
18,174

 
$
18,174

 
$
18,174

 
$
0

 
$
0

Interest bearing deposits with banks
13,235

 
13,235

 
13,235

 
0

 
0

Restricted investments in bank stock
8,350

 
n/a

 
n/a

 
n/a

 
n/a

Securities available for sale
376,199

 
376,199

 
0

 
376,199

 
0

Loans held for sale
3,159

 
3,249

 
0

 
3,249

 
0

Loans, net of allowance for loan losses
690,199

 
697,506

 
0

 
0

 
697,506

Accrued interest receivable
3,097

 
3,097

 
0

 
1,593

 
1,504

Mortgage servicing rights
2,684

 
2,785

 
0

 
0

 
2,785

Financial Liabilities
 
 
 
 
 
 
 
 
 
Deposits
949,704

 
950,667

 
0

 
950,667

 
0

Short-term borrowings
86,742

 
86,742

 
0

 
86,742

 
0

Long-term debt
14,812

 
15,610

 
0

 
15,610

 
0

Accrued interest payable
273

 
273

 
0

 
273

 
0

Off-balance sheet instruments
0

 
0

 
0

 
0

 
0

December 31, 2013
 
 
 
 
 
 
 
 
 
Financial Assets
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
12,995

 
$
12,995

 
$
12,995

 
$
0

 
$
0

Interest bearing deposits with banks
24,565

 
24,565

 
24,565

 
0

 
0

Restricted investments in bank stock
9,921

 
n/a

 
n/a

 
n/a

 
n/a

Securities available for sale
406,943

 
406,943

 
0

 
406,943

 
0

Loans held for sale
1,936

 
1,936

 
0

 
1,936

 
0

Loans, net of allowance for loan losses
650,072

 
655,122

 
0

 
0

 
655,122

Accrued interest receivable
3,400

 
3,400

 
0

 
1,902

 
1,498

Mortgage servicing rights
2,806

 
3,090

 
0

 
0

 
3,090

Financial Liabilities
 
 
 
 
 
 
 
 
 
Deposits
1,000,390

 
1,002,235

 
0

 
1,002,235

 
0

Short-term borrowings
59,032

 
59,032

 
0

 
59,032

 
0

Long-term debt
16,077

 
16,645

 
0

 
16,645

 
0

Accrued interest payable
333

 
333

 
0

 
333

 
0

Off-balance sheet instruments
0

 
0

 
0

 
0

 
0