Note 8 - Fair Value Measurement

3 Months Ended

Mar. 31, 2013

Fair Value Disclosures [Text Block]

Note 8 — Fair Value Measurement

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of March 31, 2013 and December 31, 2012, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

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

· Level 2—Estimates based on significant other observable inputs that market participants would use in pricing the asset or liability

· Level 3—Estimates based on significant unobservable inputs that reflect the entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability.  Valuation techniques include management’s judgment, which may be a significant factor.

For some assets or liabilities, the inputs used to measure fair value may fall into more than one level of the fair value hierarchy.  In such cases, the asset or liability is identified based on the lowest level input that is significant to the fair value measurement.  The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and considers factors specific to the asset or liability.

No warrants were subject to fair value accounting as of March 31, 2013 or December 31, 2012.

Assets and liabilities measured at fair value on a recurring basis are summarized below:

	Fair Value Measurements Using
(in thousands)	Level 1		Level 2		Level 3			Total
March 31, 2013
Available for sale securities:
U.S. Government agencies	$	-	$	22,149	$	-		$	22,149
Residential mortgage-backed securities		-		80,228		-			80,228
Municipal securities		-		19,449		-			19,449
Corporate debt securities		-		4,272		-			4,272
Asset-backed securities		-		16,820		-			16,820
Total available-for-sale securities		-		142,918		-			142,918
Loans held for sale		-		-		1,426			1,426
Total net assets measured at fair value on a recurring basis	$	-	$	142,918	$	1,426		$	144,344
December 31, 2012
Available for sale securities:
U.S. Government agencies	$	-	$	30,589	$	-		$	30,589
Residential mortgage-backed securities		-		61,660		-			61,660
Municipal securities		-		19,273		-			19,273
Corporate debt securities		-		2,996		-			2,996
Asset-backed securities		-		13,304		-			13,304
Total available-for-sale securities		-		127,822		-			127,822
Loans held for sale		-		-		1,548			1,548
Total net assets measured at fair value on a recurring basis	$	-	$	127,822	$	1,548		$	129,370
March 31, 2012
Available for sale securities:
U.S. Government agencies	$	-	$	26,998	$	-		$	26,998
Residential mortgage-backed securities		-		86,878		-			86,878
Municipal securities		-		4,813		-			4,813
Corporate debt securities		-		3,039		-			3,039
Asset-backed securities		-		6,894		-			6,894
Total available-for-sale securities		-		128,622		-			128,622
Loans held for sale		-		-		5,874			5,874
Warrant liability		-		-		(200	)		(200	)
Total net assets measured at fair value on a recurring basis	$	-	$	128,622	$	5,674		$	134,296

The fair value of securities available for sale equals quoted market prices, if available.  If quoted market prices are not available, fair value is determined using quoted market prices for similar securities.  There were no changes in the valuation techniques used during 2013 or 2012 and there were no transfers into or out of Levels 1, 2 or 3 of the fair value hierarchy during the three months ended March 31, 2013.

Loans held for sale that are measured at fair value on a recurring basis consist of all loans held by the company’s MAM subsidiary.  Those loans are carried at the lower of cost or fair value and, accordingly, have been subject to recurring fair value adjustments.  Fair value for those loans is determined by assessing the probability of borrower default using historical payment performance and available cash flows to the borrower, then projecting the amount and timing of cash flows to MAM, including collateral liquidation if repayment weaknesses exist.

Management monitors the availability of observable market data to assess the appropriate classifications of financial instruments within the fair value hierarchy.  Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another.  In such instances, the transfer is reported at the beginning of the reporting period.

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

(in thousands)	Fair Value Measurements Using								Current Period Gains
March 31, 2013	Level 1		Level 2		Level 3		Total		(Losses)
Financial assets measured at fair value on a non-recurring basis:
Impaired loans, net of specific reserves--
Commercial and industrial	$	-	$	-	$	97	$	97	$	(83	)
Residential real estate		-		-		496		496		4
Commercial real estate - owner-occupied		-		-		1,423		1,423		19
Commercial real estate - non-owner-occupied		-		-		679		679		12
All other real estate		-		-		24		24		1
Construction and land development		-		-		201		201		2
Total impaired loans, net of charge-offs and specific reserves	$	-	$	-	$	2,920	$	2,920	$	(45	)
Non-financial assets measured at fair value on a non-recurring basis:
Other real estate owned	$	-	$	-	$	818	$	818	$	-

	Fair Value Measurements Using								Full Year Gains
December 31, 2012	Level 1		Level 2		Level 3		Total		(Losses)
Financial assets measured at fair value on a non-recurring basis:
Impaired loans, net of specific reserves--
Commercial and industrial	$	-	$	-	$	1,969	$	1,969	$	7
Residential real estate		-		-		570		570		(324	)
Commercial real estate - owner-occupied		-		-		2,232		2,232		(20	)
Commercial real estate - non-owner-occupied		-		-		683		683		(66	)
All other real estate		-		-		27		27		(2	)
Construction and land development		-		-		452		452		(96	)
Total impaired loans, net of charge-offs and specific reserves	$	-	$	-	$	5,933	$	5,933	$	(501	)
Non-financial assets measured at fair value on a non-recurring basis:
Other real estate owned	$	-	$	-	$	818	$	818	$	(463	)

	Fair Value Measurements Using								Current Period  Gains
March 31, 2012	Level 1		Level 2		Level 3		Total		(Losses)
Financial assets measured at fair value on a non-recurring basis:
Impaired loans, net of specific reserves--
Commercial and industrial	$	-	$	-	$	582	$	582	$	-
Residential real estate		-		-		61		61		-
Commercial real estate - owner-occupied		-		-		1,571		1,571		-
Commercial real estate - non-owner-occupied		-		-		-		-		(128	)
All other real estate		-		-		-		-		-
Construction and land development		-		-		-		-		(190	)
Total impaired loans, net of charge-offs and specific reserves	$	-	$	-	$	2,214	$	2,214	$	(318	)
Non-financial assets measured at fair value on a non-recurring basis:
Other real estate owned	$	-	$	-	$	2,224	$	2,224	$	(358	)

The following methods were used to estimate the fair value of each class of assets above.  The fair value of impaired loans is based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less estimated costs to sell if repayment is expected solely from the collateral.  Collateral values are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria.  Collateral-dependent impaired loans are categorized as Level 3 due to ongoing real estate conditions resulting in inactive market data which, in turn, required the use of unobservable inputs and assumptions in fair value measurements.  Impaired loans were measured and reported at fair value through specific valuation allocations of the allowance for loan and lease losses and/or partial charge-offs of the impaired loans.

The fair value of other real estate owned is based on the values obtained through property appraisals, which can include observable and unobservable inputs.  Other real estate owned fair values are categorized as Level 3 due to ongoing real estate conditions resulting in inactive market data which required the use of unobservable inputs and assumptions in fair value measurements.

The following table presents a reconciliation of net assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the first three months of 2013 and 2012:

(in thousands)	Level 3 Securities Available for Sale, Loans Held for Sale and Warrant Liability
	Three Months Ended March 31
	2013			2012
Balance at beginning of year	$	1,548		$	(1,464	)
Net (decrease) increase in SBA loans held for sale		(66	)		61
Loans held for sale transfered into Level 3		-			4,282
Settlements - principal reductions in loans held for sale		(197	)		(21	)
Loan participations sold to related party		-			(2,168	)
Reduction in loans held for sale valuation reserve		141			-
Cancellation of warrants accounted for as liabilities		-			4,955
Changes in fair value of warrant liability		-			30
Balance at end of period	$	1,426		$	5,675

“Settlements” in the above table relate to actual cash payments received from borrowers on loans held for sale and do not represent refinancings or write-downs to fair value.  The following methods and assumptions were used to estimate the fair value of significant financial instruments that are not carried at fair value in the consolidated balance sheet:

Financial Assets.  The carrying amounts of cash and short-term investments are considered to approximate fair value.  Short-term investments include federal funds sold and interest bearing deposits with other banks.  For investment securities, fair values are based on quoted market prices, where available.  If quoted market prices are not available, fair values are estimated using other observable data, which may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other factors.  The fair value of loans (including loans held for sale) are estimated using a combination of techniques, including discounting estimated future cash flows and quoted market prices of similar instruments, where available, and are considered to be within Level 2.  Impaired loans are within Level 3 of the fair value hierarchy.  The carrying value of accrued interest receivable approximates fair value.  The carrying amount of FHLB and FRB stock approximate their fair value.

Financial Liabilities.  The carrying amounts of deposit liabilities payable on demand and short-term borrowed funds are considered to approximate fair value.  For fixed maturity (i.e., time) deposits, which are within Level 2 of the fair value hierarchy, fair value is estimated by discounting estimated future contractual cash flows using currently offered rates for deposits of similar remaining maturities.  The fair value of junior subordinated debt securities (Level 2) is based on rates currently available to the Bank for debt with similar terms and remaining maturities.

Off-Balance Sheet Financial Instruments.  The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements.  The fair value of these financial instruments is not material.

The estimated fair value of financial instruments is summarized as follows:

(in thousands)	March 31, 2013				December 31, 2012				March 31, 2012
	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value
Financial Assets:
Cash and due from banks	$	10,063	$	10,063	$	25,635	$	25,635	$	67,093	$	67,093
Interest-bearing deposits in other banks		3,210		3,210		3,706		3,706		3,492		3,492
Investment securities		142,918		142,918		127,822		127,822		128,622		128,622
Loans held for sale		1,426		1,426		1,548		1,548		5,874		5,874
Loans, net of allowance for loan and lease losses		239,827		240,666		239,499		244,979		216,534		215,233
Federal Home Loan Bank and other stocks		6,868		6,868		6,822		6,822		3,801		3,801
Accrued interest receivable		1,238		1,238		1,361		1,361		1,216		1,216
Financial Liabilities:
Deposits		386,347		386,619		387,268		387,589		405,280		405,582
Junior subordinated debt securities		5,632		4,611		5,604		4,607		5,519		4,612
Accrued interest payable		115		115		111		111		205		205
Warrant liability		-		-		-		-		199		199