FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2014

Schdeule of Fair Value Measures and Disclosures (Tables)

FAIR VALUE MEASUREMENTS

5. 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.

Management monitors the availability of observable market data to assess the appropriate classification 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.

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and nonrecurring basis (in thousands):

Recurring Basis

	Fair Value Measurements at March 31, 2014 Using:
	Total		Level 1		Level 2		Level 3
Available-for-sale securities:
Obligations of U.S. government sponsored agencies	$	18,537	$	—	$	18,537	$	—
Obligations of state and political subdivisions		4,543		—		4,543		—
Government sponsored agency mortgage-backed securities		242,254		—		242,254		—
Corporate debt securities		4,860		—		4,860		—
Equity securities		2,949		—		2,949		—
	$	273,143	$	—	$	273,143	$	—
	Fair Value Measurements at December 31, 2013 Using:
	Total		Level 1		Level 2		Level 3
Available-for-sale securities:
Obligations of U.S. government sponsored agencies	$	18,198	$	—	$	18,198	$	—
Obligations of state and political subdivisions		5,317		—		5,317		—
Government sponsored agency mortgage-backed securities		248,277		—		248,277		—
Corporate debt securities		4,755		—		4,755		—
Equity securities		2,932		—		2,932		—
	$	279,479	$	—	$	279,479	$	—

Fair values for Level 2 available-for-sale investment securities are based on quoted market prices for similar securities. During the year ended March 31, 2014, there were no transfers between Levels 1 and 2.

There were no liabilities measured at fair value on a recurring basis at March 31, 2014 or 2013.

Nonrecurring Basis

	Total at								Total Losses
	March 31,		Fair Value Measurements Using:						For three months ended March 31,
	2014		Level 1		Level 2		Level 3		2014		2013
Impaired loans:
Commercial	$	—	$	—	$	—	$	—	$	—	$	287
Real estate - commercial		—		—		—		—		—		437
Real estate - construction		—		—		—		—		—		357
Real estate - mortgage		863		—		—		863		217		86
Other		46		—		—		46		34		—
Other real estate owned:
Real estate - commercial		—		—		—		—		—		215
Real estate - construction		—		—		—		—		—		46
Total assets measured at fair value on a nonrecurring basis	$	909	$	—	$	—	$	909	$	251	$	1,428
	Total at
	December 31,		Fair Value Measurements Using:
	2013		Level 1		Level 2		Level 3		Total Losses
Impaired loans:
Commercial	$	157	$	—	$	—	$	157	$	63
Real estate - commercial		593		—		—		593		239
Real estate - construction		110		—		—		110		71
Real estate - mortgage		291		—		—		291		42
Other		164		—		—		164		71
Other real estate owned:
Real estate - commercial		570		—		—		570		57
Real estate - construction		2,147		—		—		2,147		1,125
Total assets measured at fair value on a nonrecurring basis	$	4,032	$	—	$	—	$	4,032	$	1,668

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):

March 31, 2014	Fair Value		Valuation Techniques	Unobservable Inputs	Range(WeightedAverage)
Impaired loans:
Real estate - mortgage	$	863	Sales comparison approach	Adjustment for differences between the comparable sales	6% to 11% (9%)
Other	$	46	Sales comparison approach	Adjustment for differences between the comparable sales	6% to 11% (9%)
December 31, 2013	Fair Value		Valuation Techniques	Unobservable Inputs	Range(WeightedAverage)
Impaired loans:
Commercial	$	157	Sales comparison approach	Adjustment for differences between the comparable sales	6% to 11% (9%)
Real estate - commercial	$	593	Sales comparison approach	Adjustment for differences between the comparable sales	6% to 11% (9%)
Real estate - construction	$	110	Sales comparison approach	Adjustment for differences between the comparable sales	2% to 3% (3%)
Real estate - mortgage	$	291	Sales comparison approach	Adjustment for differences between the comparable sales	6% to 11% (9%)
Other	$	164	Sales comparison approach	Adjustment for differences between the comparable sales	6% to 11% (9%)
Other real estate owned:
Real estate - commercial	$	570	Sales comparison approach	Adjustment for differences between the comparable sales	6% to 11% (9%)
Real estate - construction	$	2,147	Sales comparison approach	Adjustment for differences between the 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 March 31, 2014 and 2013 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 values 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
			March 31, 2014 Using
	Carrying
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS
Cash and due from banks	$	22,718	$	22,718	$	—	$	—	$	22,718
Federal funds sold		44,750		44,750		—		—		44,750
Time deposits at other financial institutions		2,226		—		2,226		—		2,226
FHLB, FRB and other securities		8,408		—		—		—		N/A
Securities:
Available-for-sale		273,143		—		273,143		—		273,143
Held-to-maturity		2		—		2		—		2
Loans		498,998		—				508,901		508,901
Accrued interest receivable		2,099		—		661		1,438		2,099
FINANCIAL LIABILITIES
Deposits:
Nonmaturity deposits	$	642,403	$	642,403	$	—	$	—	$	642,403
Time deposits		143,414		—		143,495		—		143,495
Subordinated debentures		21,651		—		—		7,961		7,961
Accrued interest payable		107		2		30		75		107
			Fair Value Measurements at
			December 31, 2013 Using
	Carrying
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS
Cash and due from banks	$	19,348	$	19,348	$	—	$	—	$	19,348
Federal funds sold		38,135		38,135		—		—		38,135
Time deposits at other financial institutions		2,226		—		2,226		—		2,226
FHLB, FRB and other securities		8,402		—		—		—		N/A
Securities:
Available-for-sale		279,479		—		279,479		—		279,479
Held-to-maturity		2		—		2		—		2
Loans		499,943		—				510,611		510,611
Accrued interest receivable		2,124		—		692		1,432		2,124
FINANCIAL LIABILITIES
Deposits:
Nonmaturity deposits	$	638,112	$	638,112	$	—	$	—	$	638,112
Time deposits		149,737		—		149,899		—		149,899
Subordinated debentures		21,651		—		—		7,702		7,702
Accrued interest payable		108		2		29		77		108