17.	Fair Value:

The following disclosures about fair value of financial instruments are made in accordance with provisions of ASC 825 “Financial Instruments.” The use of different assumptions and estimation methods could have a significant effect on fair value amounts. Accordingly, the estimates of fair value herein are not necessarily indicative of the amounts that might be realized in a current market exchange.

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


	2012				2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Financial assets:
Cash and cash equivalents	$	28,701	$	28,701	$	19,859	$	19,859
Securities available for sale		389,885		389,885		346,542		346,542
Loans held-for-sale		—		—		1,058		1,058
Loans		870,416		871,802		820,152		814,882
Interest receivable		4,520		4,520		4,725		4,725
Federal Home Loan Bank stock		10,462		10,462		10,652		10,652
Bank-owned life insurance		15,621		15,621		15,038		15,038

Financial liabilities:
Deposits	$	1,046,154	$	1,046,165	$	965,254	$	965,724
Federal funds and overnight funds purchased		11,570		11,570		12,300		12,300
Federal Home Loan Bank borrowings		118,000		119,517		101,500		103,884
Junior subordinated debentures		8,248		2,193		8,248		2,039
Accrued interest payable		218		218		264		264

Cash and Cash Equivalents – The carrying amount approximates fair value.

Securities available-for-sale and Federal Home Loan Bank stock – Fair value is based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. FHLB stock is valued based on the most recent redemption price.

Loans Held-for-sale – Fair value represents the anticipated proceeds from the sale of related loans.

Loans – For variable rate loans that reprice frequently and have no significant change in credit risk, fair value is based on carrying values. Fair value of fixed rate loans is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable, and consider credit risk.

Interest receivable and payable – The carrying amounts of accrued interest receivable and payable approximate their fair value.

Federal Home Loan Bank stock – The carrying amount approximates fair value.

Bank-owned life insurance – The carrying amount approximates fair value.

Deposits – Fair value of demand, interest bearing demand and savings deposits is the amount payable on demand at the reporting date. Fair value of time deposits is estimated using the interest rates currently offered for deposits of similar remaining maturities.

Federal Funds Purchased – The carrying amount is a reasonable estimate of fair value because of the short-term nature of these borrowings.

Federal Home Loan Bank Borrowings – Fair value of Federal Home Loan Bank borrowings is estimated by discounting future cash flows at rates currently available for debt with similar terms and remaining maturities.

Junior Subordinated Debentures – Fair value of Junior Subordinated Debentures is estimated by discounting future cash flows at rates currently available for debt with similar credit risk, terms and remaining maturities.

Off-Balance Sheet Financial Instruments – The carrying amount and fair value are based on fees charged for similar commitments and are not material.

The Company also adheres to the FASB guidance with regards to ASC 820, “Fair Value Measures.” This guidance defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The statement requires fair value measurement disclosure of all assets and liabilities that are carried at fair value on either a recurring or nonrecurring basis. The Company determines fair value based upon quoted prices when available or through the use of alternative approaches, such as matrix or model pricing, when market quotes are not readily accessible or available. The valuation techniques used are based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1 – Quoted prices for identical instruments in active markets.

Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active or model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 – Unobservable inputs are used to measure fair value to the extent that observable inputs are not available. The Company’s own data used to develop unobservable inputs is adjusted for market consideration when reasonably available.

Financial instruments, measured at fair value, are broken down in the tables below by recurring or nonrecurring measurement status. Recurring assets are initially measured at fair value and are required to be remeasured at fair value in the financial statements at each reporting date. Assets measured on a nonrecurring basis are assets that, due to an event or circumstance, were required to be remeasured at fair value after initial recognition in the financial statements at some time during the reporting period.

The following table presents information about the level in the fair value hierarchy for the Company’s assets and liabilities not measured at fair value as of December 31, 2012:


	Fair Value at December 31, 2012
	Total		Level 1		Level 2		Level 3

Financial assets:
Cash and cash equivalents	$	28,701	$	28,701	$	—	$	—
Loans		871,802		—		—		871,802
Interest receivable		4,520		4,520		—		—
Federal Home Loan Bank stock		10,462		10,462		—		—
Bank-owned life insurance		15,621		15,621		—		—

Financial liabilities:
Deposits	$	1,046,165	$	—	$	1,046,165	$	—
Federal funds and overnight funds purchased		11,570		11,570		—		—
Federal Home Loan Bank borrowings		119,517		—		119,517		—
Junior subordinated debentures		2,193		—		2,193		—
Accrued interest payable		218		218		—		—

The tables below show assets measured at fair value on a recurring basis as of December 31, 2012, and December 31, 2011:


			Fair Value Measurements Using
December 31, 2012	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Available-for-sale securities
Obligations of U.S government agencies	$	17,844	$	—	$	17,844	$	—
Obligation of states and political subdivisions		81,501		—		81,501		—
Private-label mortgage-backed securities		8,600		—		6,918		1,682
Mortgage-backed securities		281,940		—		281,940		—

Total available-for-sale securities	$	389,885	$	—	$	388,203	$	1,682


			Fair Value Measurements Using
December 31, 2011	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Available-for-sale securities
Obligations of U.S government agencies	$	12,958	$	—	$	12,958	$	—
Obligation of states and political subdivisions		49,576		—		49,576		—
Private-label mortgage-backed securities		11,927		—		10,208		1,719
Mortgage-backed securities		272,081		—		272,081		—

Total available-for-sale securities	$	346,542	$	—	$	344,823	$	1,719

No transfers to or from Level 1 or 2 occurred during 2012 or 2011 on assets measured at fair value on a recurring basis

The following table provides a reconciliation of assets measured at fair value on a recurring basis using unobservable inputs (Level 3) from December 31, 2011, to December 31, 2012:


	Private-label Mortgage- backed Securities			Private-label Mortgage- backed Securities
Beginning balance	$	1,719		$	2,292
Transfers into Level 3		—			353
Transfers out of Level 3		—			—
Total gains or losses
Included in earnings		—			(113	)
Included in other comprehensive income		320			(86	)
Paydowns		(357	)		(346	)
Purchases, issuances, sales, and settlements
Purchases		—			—
Issuances		—			—
Sales		—			(381	)
Settlements		—			—

Ending Balance	$	1,682		$	1,719

Fair value for all classes of available-for-sale securities is estimated by obtaining quoted market prices for identical assets, where available. If such prices are not available, fair value is based on quoted prices for similar instruments or model-derived valuations whose inputs are observable or whose significant value drivers are observable. In instances where quoted prices for identical or similar instruments and observable inputs are not available, unobservable inputs, including the Company’s own data, are used.

The Company utilizes an independent third-party asset pricing service to estimate fair value on all of its available-for-sale securities. The inputs used to value all securities include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research, market indicators, and industry and economic trends. Additional inputs specific to each asset type are as follows:

•

Obligations of U.S. government agencies – TRACE reported trades.

•

Obligations of states and political subdivisions – MSRB reported trades, material event notices, and Municipal Market Data (MMD) benchmark yields.

•

Private-label mortgage-backed securities – new issue data, monthly payment information, and collateral performance (whole loan collateral).

•

Mortgage-backed securities – TBA prices and monthly payment information.

Inputs may be prioritized differently on any given day for any security and not all inputs listed are available for use in the evaluation process on any given day for each security evaluation.

The valuation methodology used by asset type includes:

•

Obligations of U.S. government agencies – security characteristics, defined sector break-down, benchmark yields, applied base spread, yield to maturity (bullet structures), corporate action adjustment, and evaluations based on T+3 settlement.

•

Obligations of states and political subdivisions – security characteristics, benchmark yields, applied base spread, yield to worst or market convention, ratings updates, prepayment schedules (housing bonds), material event notice adjustments, and evaluations based on T+3 settlement.

•

Private-label mortgage-backed securities – security characteristics, prepayment speeds, cash flows, TBA, Treasury and swap curves, IO/PO strips or floating indexes, applied base spread, spread adjustments, yield to worst or market convention, ratings updates (whole-loan collateral), and evaluations based on T+0 settlement.

•

Mortgage-backed securities – security characteristics, TBA, Treasury, or floating index benchmarks, spread to TBA levels, prepayment speeds, applied spreads, and evaluations based on T+0 settlement.

The third-party pricing service follows multiple review processes to assess the available market, credit and deal-level information to support its valuation estimates. If sufficient objectively verifiable information is not available to support a security’s valuation an alternate independent evaluation source will be used.

The Company’s securities portfolio was valued through its independent third-party pricing service using evaluated pricing models and quoted prices based on market data. For further assurance, the Company’s estimate of fair value was compared to an additional independent third-party estimate at December 31, 2012, and we obtained key inputs for a sample of securities across sectors and evaluated those inputs for reasonableness. This analysis was performed at the individual security level and no material variances were noted.

There have been no significant changes in the valuation techniques during the periods reported.

The tables below show assets measured at fair value on a nonrecurring basis as of December 31, 2012, and December 31, 2011:


			Fair Value Measurements Using
December 31, 2012	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Twelve Months Ended December 31, 2012 Total Loss

Loans measured for impairment (net of guarantees and specific reserve)	$	5,877	$	—	$	—	$	5,877	$	2
Other real estate owned		17,972		—		—		17,972		1,416

	$	23,849	$	—	$	—	$	23,849	$	1,418


			Fair Value Measurements Using
December 31, 2011	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Twelve Months Ended December 31, 2011 Total Loss

Loans measured for impairment (net of guarantees and specific reserve)	$	22,969	$	—	$	—	$	22,969	$	455
Other real estate owned		11,000		—		—		11,000		2,427

	$	33,969	$	—	$	—	$	33,969	$	2,882

No transfers to or from Level 3 occurred during 2012 or 2011 on assets measured at fair value on a nonrecurring basis.

The following is a description of the inputs and valuation methodologies used for assets recorded at fair value on a nonrecurring basis.

Loans measured for impairment (net of government guarantees and specific reserves) include the estimated fair value of collateral-dependent loans, less collectible government guarantees, as well as certain noncollateral-dependent loans measured for impairment with an allocated specific reserve. When a collateral-dependent loan is identified as impaired, the value of the loan is measured using the current fair value of the collateral less selling costs. The fair value of collateral is generally estimated by obtaining external appraisals which are usually updated every 6 to 12 months based on the nature of the impaired loans. Certain noncollateral-dependent loans measured for impairment with an allocated specific reserve are valued based upon the estimated net realizable value of the loan. If the estimated fair value of the impaired loan, less collectible government guarantees, is less than the recorded investment in the loan, impairment is recognized as a charge-off through the allowance for loan losses. The carrying value of the loan is adjusted to the estimated fair value. The carrying value of loans fully charged off is zero.

Other real estate owned represents real estate which the Company has taken control of in partial or full satisfaction of loans. At the time of foreclosure, other real estate owned is recorded at the lower of the carrying amount of the loan or fair value less costs to sell, which becomes the property’s new basis. Any write downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, management periodically orders appraisals or performs valuations to ensure that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Appraisals are generally updated every 6 to 12 months on other real estate owned. Fair value adjustments on other real estate owned are recognized within net loss on real estate owned. The loss represents impairments on other real estate owned for fair value adjustments based on the fair value of the real estate.

There have been no significant changes in the valuation techniques during the periods reported.