FAIR VALUES AND MEASUREMENTS OF FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2013

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

NOTE 10 FAIR VALUES AND MEASUREMENTS OF FINANCIAL INSTRUMENTS

The Corporation groups its assets and liabilities measured at fair value into a three-level hierarchy for valuation techniques used to measure assets and liabilities at fair value. This hierarchy is based on whether the valuation inputs are observable or unobservable. These levels are:

· Level 1 – Quoted prices in active markets for identical assets or liabilities.

· Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

· 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.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Corporation’s assessment of the significance of particular inputs to these fair value measurements requires significant management judgment or estimation and considers factors specific to each asset or liability.

U.S. Government and federal agencies and mortgage-backed securities

Valuations are based on active market data and use of evaluated broker pricing models that vary based on asset class and includes available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, descriptive terms and conditions databases coupled with extensive quality control programs. Multiple quality control evaluation processes review available market, credit and deal level information to support the evaluation of the security. If there is a lack of objectively verifiable information available to support the valuation, the evaluation of the security is discontinued. Additionally, proprietary models and pricing systems, mathematical tools, actual transacted prices, integration of market developments and experienced evaluators are used to determine the value of a security based on a hierarchy of market information regarding a security or securities with similar characteristics. Management reviews the data and assumptions used in pricing the securities by its third party provider to ensure the highest level of significant inputs are derived from market observable data.

State and political subdivisions

Proprietary valuation matrices are used for valuing all tax-exempt municipals that can incorporate changes in the municipal market as they occur. Market evaluation models include the ability to value bank qualified municipals and general market municipals that can be broken down further according to insurer, credit support, state of issuance and rating to incorporate additional spreads and municipal curves. Taxable municipals are valued using a third part model that incorporates a methodology that captures the trading nuances associated with these bonds.

The following table presents information about the Corporation’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012, and the valuation techniques used by the Corporation to determine those fair values.

Assets and liabilities measured at fair value on a recurring basis for the periods indicated:

	Quoted Prices in		Significant		Significant
(Dollar amounts in thousands)	Active Markets		Observable		Unobservable
	For Identical		Inputs		Inputs
March 31, 2013	Assets (Level 1)		(Level 2)		(Level 3)		Balance
Assets
State and political subdivisions		0		9,941		0		9,941
Mortgage-backed securities		0		4,154		0		4,154
Total Assets	$	0	$	14,095	$	0	$	14,095
Liabilities	$	0	$	0	$	0	$	0
December 31, 2012
Assets
State and political subdivisions		0		10,272		0		10,272
Mortgage-backed securities		0		4,501		0		4,501
Total Assets	$	0	$	14,773	$	0	$	14,773
Liabilities	$	0	$	0	$	0	$	0

Securities characterized as having Level 2 inputs generally consist of obligations of U.S. Government and federal agencies, government-sponsored organizations and obligations of state and political subdivisions. There were no transfers in or out of Levels 1 and 2 for the period ending March 31, 2013.

The Corporation also has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. These assets consist primarily of impaired loans and other real estate owned (“OREO”). The Corporation has estimated the fair values of these assets using Level 3 inputs. Management considers third party appraisals as well as independent fair market value assessments from realtors or persons involved in selling other real estate owned when determining the fair value of particular properties.

The following table presents financial assets and liabilities measured on a nonrecurring basis.

	Fair Value Measurements at Reporting Date Using
	Balance at
(In thousands)	March 31,		Level 1		Level 2		Level 3
2013
Impaired loans	$	10,798	$	0	$	0	$	10,798
Real estate acquired through foreclosure		0		0		0		0

	Balance at
(In thousands)	December 31,		Level 1		Level 2		Level 3
2012
Impaired loans	$	12,056	$	0	$	0	$	12,056
Real estate acquired through foreclosure		128		0		0		128

A loan is considered impaired when, based on current information and events it is probable the Corporation will be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Loan impairment is measured using the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral (less selling costs) if the loan is collateral dependent. Collateral may be real estate and/or business assets, including equipment, inventory and accounts receivable. The value of business equipment, inventory and accounts receivable collateral is based on net book value on the business’ financial statements and, if necessary, discounted based on management’s review and analysis. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s business. Impaired loans are subject to nonrecurring fair value adjustments to reflect (1) partial write downs that are based on the observable market price or current appraised value of the collateral, or (2) the full charge-off of the loan carrying value.

Other real estate owned acquired through or instead of loan foreclosure is adjusted to fair value upon transfer of the loan to OREO. Subsequently, OREO is carried at the lower of carrying value or fair value. The estimated fair value for other real estate owned is determined by independent market-based appraisals and other available market information. Accordingly, the valuations of OREO and other repossessed assets are subject to significant judgment. If the fair value of the collateral deteriorates subsequent to initial recognition, a valuation allowance is recorded through expense. Additionally, any operating costs incurred after acquisition are also expensed.

The tables below presents the estimated fair values of the Corporation’s financial instruments for the periods indicated.

							Quoted Prices			Significant
							In Active			Other			Significant
(Dollar amounts in thousands)							Markets for			Observable			Unobservable
	Carrying			Estimated			Identical Assets			Inputs			Inputs
March 31, 2013	Amount			Fair Value			(Level 1)			(Level 2)			(Level 3)
Financial Assets:
Cash equivalents and federal funds sold	$	33,581		$	33,581		$	33,581		$	0		$	0
Securities available for sale		14,095			14,095			0			14,095			0
Other investment securities		2,259			2,259			0			0			2,259
Loans, net of allowance for loan loss		235,726			227,071			0			0			227,071
Accrued interest receivable		1,258			1,258			0			0			1,258
Financial Liabilities:
Noninterest-bearing deposits	$	(46,777	)	$	(46,777	)	$	(46,777	)	$	0		$	0
Interest-bearing deposits		(142,442	)		(142,442	)		0			(142,442	)		0
Time deposits		(81,508	)		(80,568	)		0			(80,568	)		0
FHLB advances		(1,894	)		(1,781	)		0			(1,781	)		0
Accrued interest payable		(93	)		(93	)		0			0			(93	)

							Quoted Prices			Significant
							In Active			Other			Significant
(Dollar amounts in thousands)							Markets for			Observable			Unobservable
	Carrying			Estimated			Identical Assets			Inputs			Inputs
December 31, 2012	Amount			Fair Value			(Level 1)			(Level 2)			(Level 3)
Financial Assets:
Cash equivalents and federal funds sold	$	22,904		$	22,904		$	22,904		$	0		$	0
Securities available for sale		14,773			14,733			0			14,733			0
Other investment securities		2,259			2,259			0			0			2,259
Loans, net of allowance for loan loss		243,303			240,910			0			0			240,910
Accrued interest receivable		1,181			1,181			0			0			1,181
Financial Liabilities:
Noninterest-bearing deposits	$	(45,616	)	$	(45,616	)	$	(45,616	)	$	0		$	0
Interest-bearing deposits		(139,632	)		(139,632	)		0			(139,632	)		0
Time deposits		(83,191	)		(82,216	)		0			(82,216	)		0
FHLB advances		(1,922	)		(1,854	)		0			(1,854	)		0
Accrued interest payable		(93	)		(93	)		0			0			(93	)

The following describes the valuation methodologies used by management to measure financial assets and liabilities at fair value. Where appropriate, the description includes information about the valuation models and key inputs to those models.

· Cash equivalents and federal funds sold – The carrying value of cash, amounts due from banks and federal funds sold assumed to approximate fair value.

· Investment securities – Fair value is based on quoted market prices in active markets for identical assets or similar assets in active markets. If quoted market prices are not available, with the assistance of an independent pricing service, management’s fair value measurements consider observable data which may include market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows.

· Other investment securities – principally consists of investments in Federal Home Loan Bank stock, which has limited marketability and is carried at cost.

· Loans – The loan portfolio includes adjustable and fixed-rate loans, the fair value of which is estimated using discounted cash flow analyses. To calculate discounted cash flows, the loans are aggregated into pools of similar types and expected repayment terms. The expected cash flows were based on historical prepayment experiences and estimated credit losses for non-performing loans and were discounted using current rates at which similar loans would be made to borrowers with similar credit ratings and similar remaining maturities. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

· Accrued interest receivable – The carrying value of accrued interest receivable approximates fair value due to the short-term duration.

· Noninterest-bearing deposits – The fair value of noninterest-bearing demand deposits, which have no stated maturity, were considered equal to their carrying amount, representing the amount payable on demand.

· Interest-bearing deposits – The fair value of demand, money market and savings deposits, which have no stated maturity, were considered equal to their carrying amount, representing the amount payable on demand.

· Time deposits – The fair value for fixed-rate time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for time deposits with similar terms and remaining maturities.

· FHLB advances – The fair value of long-term debt was estimated using a discounted cash flow calculation which utilizes the interest rates currently offered for borrowings of similar remaining maturities.

· Accrued interest payable – The carrying value of accrued interest payable approximates fair value due to the short-term duration.