Note 7 - Fair Value Measurement

9 Months Ended

Sep. 30, 2014

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

Note 7. Fair Value Measurement

The Company uses a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:

Level 1-Valuation is based on quoted prices in active markets for identical assets and liabilities.

Level 2-Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Level 3-Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

The following describes the valuation techniques used by the Company to measure certain assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013:

(Dollars In Thousands)			Carrying value at September 30, 2014
Description	Balance as of September 30, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U. S. Government agency securities	$	27,192		-	$	27,192		-
Mortgaged-backed securities		11,282		-		11,282		-
Municipal securities		18,188		-		18,188		-

(Dollars In Thousands)			Carrying value at December 31, 2013
Description	Balance as of December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
U. S. Government agency securities	$	26,284		-	$	26,284		-
Mortgaged-backed securities		15,361		-		15,361		-
Municipal securities		16,277		-		16,277		-

Certain assets are measured at fair value on a nonrecurring basis in accordance with generally accepted accounting principles (GAAP). Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or writedowns of individual assets.

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired Loans: The Company does not record loans at fair value on a recurring basis. However, from time to time a loan is considered impaired and a specific reserve 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. Once a loan is identified as individually impaired, management measures the extent of any loss. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, and discounted cash flow. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investment in such loans. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. If carried at market price based on current appraised value using observable market data, it is recorded as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraisal value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Other Real Estate Owned (OREO): The carrying amount of real estate owned by the Company resulting from foreclosures is estimated at the lesser of cost or the fair value of the real estate based on an observable market price or a current appraised value less selling costs. If carried at market price based on current appraised value using observable market data, it is recorded as nonrecurring Level 2. When an appraised value is not available or is not current, or management determines the fair value of the real estate is further impaired below the appraised value or there is no observable market price, the Company records the real estate as nonrecurring Level 3.

The following tables summarize the Company’s assets that were measured at fair value on a nonrecurring basis as of September 30, 2014 and December 31, 2013.

(Dollars In Thousands)			Carrying value at September 30, 2014
Description	Balance as of September 30, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans, net of valuation allowance	$	6		-	$	-	$	6
Other real estate owned		8,686		-		3,475		5,211

(Dollars In Thousands)			Carrying value at December 31, 2013
Description	Balance as of December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans, net of valuation allowance	$	306		-	$	-	$	306
Other real estate owned		8,143		-		3,745		4,398

At September 30, 2014 and December 31, 2013, the Company did not have any liabilities measured at fair value on a nonrecurring basis.

The following tables display quantitative information about Level 3 Fair Value Measurements for September 30, 2014 and December 31, 2013:

(Dollars In Thousands)	Quantitative information about Level 3 Fair Value Measurements for September 30, 2014
Assets	Fair Value		Valuation Technique(s)	Unobservable input	Range (Weighted Average)
Impaired loans	$	6	Discounted appraised value	Selling cost		20	%	-	20	%	(20	%)
				Discount for lack of marketability and age of appraisal		0	%	-	0	%	(0	%)
Other real estate owned	$	1,457	Discounted appraised value	Selling cost		0	%	-	6	%	(5	%)
				Discount for lack of marketability and age		4	%	-	33	%	(8	%)
	$	3,754	Internal evaluations	Internal evaluations		10	%	-	10	%	(10	%)

(Dollars In Thousands)	Quantitative information about Level 3 Fair Value Measurements for December 31, 2013
Assets	Fair Value		Valuation Technique(s)	Unobservable input	Range (Weighted Average)
Impaired loans	$	306	Discounted appraised value	Selling cost		10	%	-	10	%	(10	%)
				Discount for lack of marketability and age of appraisal		32	%	-	32	%	(32	%)
Other real estate owned	$	1,458	Discounted appraised value	Selling cost		0	%	-	6	%	(5	%)
				Discount for lack of marketability and age		0	%	-	25	%	(9	%)
	$	2,940	Internal evaluations	Internal evaluations		10	%	-	10	%	(10	%)

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Cash and due from banks: The carrying amounts reported in the consolidated balance sheet for cash on hand and amounts due from correspondent banks approximate their fair values. The fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of deposit to a schedule of aggregated contractual maturities on such time deposits.

Federal funds sold: Federal funds sold consist of overnight loans to other financial institutions and mature within one to three days. At September 30, 2014 and December 31, 2013, management believes the carrying value of federal funds sold approximates estimated market value.

Available-for-sale securities: Fair values for securities, excluding restricted equity securities, are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Restricted equity securities: For these restricted equity securities, the carrying amount is a reasonable estimate of fair value based on the redemption provisions of the related securities.

Loans held for sale: The carrying value of these loans approximates the fair value. These loans close in the name of the bank’s joint venture subsidiary HomeTown Residential Mortgage, LLC, but are generally sold within a two-week period.

Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

Bank owned life insurance: The cash values of these policies are estimates using information provided by insurance carriers. The policies are carried at their cash surrender value, which approximates fair value.

Deposit liabilities: The fair values disclosed for demand and savings deposits are, by definition, equal to the amount payable on demand at the reporting date. The fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of deposit to a schedule of aggregated contractual maturities on such time deposits.

Short term borrowings: Short term borrowings consist of overnight borrowings and mature within one to three days. At September 30, 2014 and December 31, 2013, management believes the carrying value of securities sold under agreements to repurchase approximates estimated market value.

FHLB borrowings: The fair values for long term borrowings are estimated using a discounted cash flow calculation that applies interest rates currently being offered on long term borrowings to the contractual maturities on such long term borrowings.

Accrued interest: The carrying amount of accrued interest receivable and payable approximates fair value.

Off-balance sheet financial instruments: The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements. At September 30, 2014 and December 31, 2013, the fair value of loan commitments and standby letters of credit were deemed to be immaterial.

The carrying amounts and approximate fair values of the Company’s financial instruments are as follows at September 30, 2014 and December 31, 2013:

(Dollars In Thousands)			Fair value at September 30, 2014
Description	Carrying value as of September 30, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Approximate Fair Values
Financial assets
Cash and due from banks	$	14,051	$	12,051	$	-	$	2,028	$	14,079
Federal funds sold		111		111		-		-		111
Securities available-for-sale		56,662		-		56,662		-		56,662
Restricted equity securities		2,577		-		2,577		-		2,577
Loans held for sale		317		-		317		-		317
Loans, net		315,842		-		-		316,414		316,414
Bank owned life insurance		3,595		-		3,595		-		3,595
Accrued income		1,777		-		1,777		-		1,777
Financial liabilities
Total deposits		351,477		-		338,622		-		338,622
Short term borrowings		469		-		469		-		469
FHLB borrowings		22,250		-		22,629		-		22,629
Accrued interest payable		295		-		295		-		295

(Dollars In Thousands)			Fair value at December 31, 2013
Description	Carrying value as of December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Approximate Fair Values
Financial assets
Cash and due from banks	$	19,537	$	17,537	$	-	$	2,004	$	19,541
Federal funds sold		738		738		-		-		738
Securities available-for-sale		57,922		-		57,922		-		57,922
Restricted equity securities		2,564		-		2,564		-		2,564
Loans, net		294,212		-		-		293,135		293,135
Bank owned life insurance		3,518		-		3,518		-		3,518
Accrued income		1,877		-		1,877		-		1,877
Financial liabilities
Total deposits		339,770		-		327,514		-		327,514
Short term borrowings		258		-		258		-		258
FHLB borrowings		22,000		-		22,560		-		22,560
Accrued interest payable		286		-		286		-		286