NOTE 14 - FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS

NOTE 14 – FAIR VALUE MEASUREMENTS

The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

● Quoted prices in active markets for identical assets (Level 1): Inputs that are quoted unadjusted prices in active markets for identical assets that the Company has the ability to access at the measurement date. An active market for the asset is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

● Significant other observable inputs (Level 2): Inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity including quoted prices for similar assets or liabilities, quoted prices for securities in inactive markets and inputs derived principally from, or corroborated by, observable market data by correlation or other means.

● Significant unobservable inputs (Level 3): Inputs that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

Assets Recorded at Fair Value on a Recurring Basis:

The table below presents assets measured at fair value on a recurring basis (in thousands).

	As of June 30, 2013
	Fair Value		Level 1		Level 2		Level 3
Available-for-sale securities:
Obligations of U.S. government sponsored agencies	$	18,552	$	—	$	18,552	$	—
Obligations of state and political subdivisions		8,431		—		8,431		—
Government sponsored agency mortgage-backed securities		271,578		—		271,578		—
Corporate debt securities		4,762		—		4,762		—
Equity securities		2,977		—		2,977		—
	$	306,300	$	—	$	306,300	$	—

	At December 31, 2012
	Fair Value		Level 1		Level 2		Level 3
Available-for-sale securities:
Obligations of U.S. government sponsored agencies	$	21,118	$	—	$	21,118	$	—
Obligations of state and political subdivisions		11,197		—		11,197		—
Government sponsored agency mortgage-backed securities		245,631		—		245,631		—
Corporate debt securities		4,756		—		4,756		—
Equity securities		3,113		—		3,113		—
	$	285,815	$	—	$	285,815	$	—

Fair values for available-for-sale investment securities are based on quoted market prices for similar securities at June 30, 2013 and December 31, 2012. During the three and six month periods ended June 30, 2013, there were no transfers between Levels 1 and 2.

Assets Recorded at Fair Value on a Nonrecurring Basis:

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-fair value accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis that were still held in the balance sheet at quarter end, the following table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets at quarter end (in thousands).

									Total Losses					Total Losses
	As of June 30, 2013								For three months ended June 30,					For six months ended June 30,
	Fair Value		Level 1		Level 2		Level 3		2013			2012		2013		2012
Impaired loans:
Commercial	$	385	$	—	$	—	$	385	$	(198	)	$	—	$	88	$	—
Real estate - commercial		625		—		—		625		—			1,278		239		1,457
Real estate - construction		450		—		—		450		—			9		357		25
Real estate - mortgage		118		—		—		118		186			70		272		70
Other		109		—		—		109		140			—		177		—
OREO:
Real estate - commercial		181		—		—		181		104			—		123		—
Real estate - construction		651		—		—		651		518			87		518		133
Real estate - mortgage		—		—		—		—		—			77		—		152
Total assets measured at fair value on a nonrecurring basis	$	2,519	$	—	$	—	$	2,519	$	750		$	1,521	$	1,774	$	1,837

	As of December 31, 2012
	Fair Value		Level 1		Level 2		Level 3
Impaired loans:
Commercial	$	585	$	—	$	—	$	585
Real estate - commercial		2,222		—		—		2,222
Real estate - construction		143		—		—		143
Real estate - mortgage		464		—		—		464
Installment		75		—		—		75
Other		25		—		—		25
OREO:
Real estate - construction		7,360		—		—		7,360
Real estate - mortgage		184		—		—		184
Total assets measured at fair value
on a nonrecurring basis	$	11,058	$	—	$	—	$	11,058

Impaired Loans - The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available, and additional discounts by management for known market factors and time since the last appraisal. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned – Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at fair value, less costs to sell. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a nonrecurring basis (in thousands): There were no adjustments for “Commercial” impaired loans.

As of June 30, 2013

	Fair Value		Valuation Techniques	Unobservable Inputs	Range (Weighted Average)
Impaired loans:
Real estate - commercial	$	625	Comparable sales approach	Discount adjustment for differences between comparable sales		6% to 11% (9%)
Real estate - construction	$	450	Comparable sales approach	Discount adjustment for differences between comparable sales		2% to 3% (3%)
Real estate - mortgage	$	118	Comparable sales approach	Discount adjustment for differences between comparable sales		6% to 11% (9%)
Other	$	109	Comparable sales approach	Discount adjustment for differences between comparable sales		6% to 11% (9%)
OREO:
Real estate - commercial	$	181	Comparable sales approach	Discount adjustment for differences between comparable sales		6% to 11% (9%)
Real estate - construction	$	651	Comparable sales approach	Discount adjustment for differences between comparable sales		0% to 6% (6%)

As of December 31, 2012

	Fair Value		Valuation Techniques	Unobservable Inputs	Range (Weighted Average)
Impaired loans:
Real estate - commercial	$	2,222	Comparable sales approach	Discount adjustment for differences between comparable sales		6% to 11% (9%)
Real estate - construction	$	143	Comparable sales approach	Discount adjustment for differences between comparable sales		2% to 3% (3%)
Real estate - mortgage	$	464	Comparable sales approach	Discount adjustment for differences between comparable sales		6% to 11% (9%)
OREO:
Real estate - commercial	$	7,360	Comparable sales approach	Discount adjustment for differences between comparable sales		6% to 11% (9%)
Real estate - construction	$	184	Comparable sales approach	Discount adjustment for differences between comparable sales		0% to 6% (6%)

Disclosures about Fair Value of Financial Instruments

The fair values presented represent the Company’s best estimate of fair value using the methodologies discussed below. The fair values of financial instruments which have a relatively short period of time between their origination and their expected realization were valued using historical cost. The values assigned do not necessarily represent amounts which ultimately may be realized. In addition, these values do not give effect to discounts to fair value which may occur when financial instruments are sold in larger quantities.

The following assumptions were used as of June 30, 2013 and December 31, 2012 to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

a) Cash and Due From Banks - The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

b) Federal Funds Sold - The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

c) Time Deposits at Other Financial Institutions - The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 2.

d) FHLB, FRB Stock and Other Securities - It was not practicable to determine the fair value of FHLB or FRB stock due to the restrictions placed on its transferability

e) Investment Securities – The fair value of investment securities are based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Available-for-sale securities are carried at fair value.

f)	Loans - Commercial loans, residential mortgages, construction loans and direct financing leases are segmented by fixed and adjustable rate interest terms, by maturity, and by performing and nonperforming categories.
	The fair value of performing loans are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
	The fair value of nonperforming loans is estimated by discounting estimated future cash flows using current interest rates with an additional risk adjustment reflecting the individual characteristics of the loans, or using the fair value of underlying collateral for collateral dependent loans as a practical expedient.

g) Deposits – The fair values disclosed for noninterest-bearing and interest-bearing demand deposits and savings and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair values for certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

h) Subordinated Debentures - The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

i) Commitments to Fund Loans/Standby Letters of Credit - The fair values of commitments are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The differences between the carrying value of commitments to fund loans or standby letters of credit and their fair value are not significant and therefore not included in the following table.

j) Accrued Interest Receivable/Payable – The carrying amounts of accrued interest approximate fair value and therefore follow the same classification as the related asset or liability.

The carrying amounts and estimated fair values of the Company’s financial instruments are as follows (in thousands):

			Fair Value Measurements at June 30, 2013, Using
	Carrying Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS
Cash and due from banks	$	21,431	$	21,431	$	—	$	—	$	21,431
Federal funds sold		—		—		—		—		—
Time deposits at other financial institutions		2,219		—		2,219		—		2,219
FHLB, FRB and other securities		8,402								N/A
Securities:
Available-for-sale		306,300		—		306,300		—		306,300
Held-to-maturity		6		—		6		—		6
Loans		494,747		—		—		503,363		503,363
Accrued interest receivable		2,257		—		794		1,463		2,257
FINANCIAL LIABILITIES
Deposits:
Nonmaturity deposits	$	607,135	$	607,135	$	—	$	—	$	607,135
Time deposits		157,920		—		158,090		—		158,090
Other borrowed funds		22,025		22,025		—		—		22,025
Subordinated debentures		21,651		—		—		8,081		8,081
Accrued interest payable		123		4		42		77		123

			Fair Value Measurements at December 31, 2012, Using
	Carrying Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS
Cash and due from banks	$	22,654	$	22,654	$	—	$	—	$	22,654
Federal funds sold		15,865		15,865		—		—		15,865
Time deposits at other financial institutions		2,219		—		2,219		—		2,219
FHLB, FRB and other securities		8,313		—		—		—		N/A
Securities:
Available-for-sale		285,815		—		285,815		—		285,815
Held-to-maturity		6		—		6		—		6
Loans		481,753		—		—		500,689		500,689
Accrued interest receivable		2,217		—		767		1,450		2,217
FINANCIAL LIABILITIES
Deposits:
Nonmaturity deposits	$	596,204	$	596,204	$	—	$	—	$	596,204
Time deposits		172,376		—		172,805		—		172,805
Subordinated debentures		21,651		—		—		9,018		9,018
Accrued interest payable		136		2		54		80		136