Fair Value Measurements and Fair Values of Financial Instruments

3 Months Ended

Mar. 31, 2013

Fair Value Measurements and Fair Values of Financial Instruments [Abstract]

Fair Value Measurements and Fair Values of Financial Instruments

Note 10.  Fair Value Measurements and Fair Values of Financial Instruments

Management uses its best judgment in estimating the fair value of the Corporation’s financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sales transaction on the dates indicated.  The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates maybe different than the amounts reported at each year-end.

FASB ASC Topic 820, “Financial Instruments”, requires disclosure of the fair value of financial assets and liabilities, including those financial assets and liabilities that are not measured and reported at fair value on a recurring and nonrecurring basis. The Corporation does not report any nonfinancial assets at fair value. FASB ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy under FASB ASC Topic 820 are as follows:

Level 1: Valuation is based on unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2:  Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.  There may be substantial differences in the assumptions used for securities within the same level.  For example, prices for U.S. Agency securities have fewer assumptions and are closer to level 1 valuations than the private label mortgage backed securities that require more assumptions and are closer to level 3 valuations.

Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Corporation’s assumptions regarding what market participants would assume when pricing a financial instrument. 

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The following methods and assumptions were used to estimate the fair values of the Corporation’s financial instruments at March 31, 2013 and December 31, 2012.

Cash and Cash Equivalents:  For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Investment securities:  The fair value of investment securities is determined in accordance with the methods described under FASB ASC Topic 820 as discussed below.

Restricted stock:  The carrying value of restricted stock approximates its fair value based on redemption provisions for the restricted stock.

Loans held for sale: The fair value of loans held for sale is determined by the price set between the Bank and the purchaser prior to origination. These loans are usually sold at par.

Net loans:  The fair value of fixed-rate loans is estimated for each major type of loan (e.g. real estate, commercial, industrial and agricultural and consumer) by discounting the future cash flows associated with such loans using rates currently offered for loans with similar terms to borrowers of comparable credit quality.  The model considers scheduled principal maturities, repricing characteristics, prepayment assumptions and interest cash flows.  The discount rates used are estimated based upon consideration of a number of factors including the treasury yield curve, expense and service charge factors. For variable rate loans that reprice frequently and have no significant change in credit quality, carrying values approximate the fair value.

Accrued Interest Receivable:  The carrying amount is a reasonable estimate of fair value.

Mortgage servicing rights:  The fair value of mortgage servicing rights is based on observable market prices when available or the present value of expected future cash flows when not available.  Assumptions such as loan default rates, costs to service, and prepayment speeds significantly affect the estimate of future cash flows. Mortgage servicing rights are carried at the lower of cost or fair value.

Deposits, Securities sold under agreements to repurchase and Long-term debt:  The fair value of demand deposits, savings accounts, and money market deposits is the amount payable on demand at the reporting date.  The fair value of fixed-rate certificates of deposit and long-term debt is estimated by discounting the future cash flows using rates approximating those currently offered for certificates of deposit and borrowings with similar remaining maturities.  Other borrowings consist of a line of credit with the FHLB at a variable interest rate and securities sold under agreements to repurchase, for which the carrying value approximates a reasonable estimate of the fair value.

Accrued interest payable:  The carrying amount is a reasonable estimate of fair value.

Derivatives:  The fair value of the interest rate swaps is based on other similar financial instruments and is classified as Level 2.

The following information regarding the fair value of the Corporation’s financial instruments should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful. 

The fair value of the Corporation's financial instruments are as follows:

	March 31, 2013
	Carrying		Fair
(Dollars in thousands)	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	111,787	$	111,787	$	111,787	$	-	$	-
Investment securities available for sale		134,832		134,832		2,199		132,633		-
Restricted stock		3,050		3,050		-		3,050		-
Loans held for sale		327		327		-		327		-
Net loans		735,221		747,245		-		-		747,245
Accrued interest receivable		3,045		3,045		-		3,045		-
Mortgage servicing rights		185		185		-		-		185
Financial liabilities:
Deposits	$	902,178	$	903,796	$	-	$	903,796	$	-
Securities sold under agreements to repurchase		39,365		39,365		-		39,365		-
Long-term debt		12,408		13,323		-		13,323		-
Accrued interest payable		469		469		-		469		-
Interest rate swaps		922		922		-		922		-
	December 31, 2012
	Carrying		Fair
(Dollars in thousands)	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	77,834	$	77,834	$	77,834	$	-	$	-
Investment securities available for sale		133,328		133,328		1,941		131,387		-
Restricted stock		3,571		3,571		-		3,571		-
Net loans		67		67		-		67		-
Loans held for sale		743,200		759,490		-		-		759,490
Accrued interest receivable		3,178		3,178		-		3,178		-
Mortgage servicing rights		235		235		-		-		235
Financial liabilities:	$
Deposits		874,440	$	876,240	$	-	$	876,240	$	-
Securities sold under agreements to repurchase		42,209		42,209		-		42,209		-
Long-term debt		12,410		13,718		-		13,718		-
Accrued interest payable		348		348		-		348		-
Interest rate swaps		1,103		1,103		-		1,103		-

Recurring Fair Value Measurements

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2013 and December 31, 2012 are as follows:

(Dollars in Thousands)	Fair Value at March 31, 2013
Asset  Description	Level 1		Level 2		Level 3		Total
Equity securities	$	2,199	$	-	$	-	$	2,199
Obligations of U.S. Government agencies		-		12,575		-		12,575
Obligations of state and political subdivisions		-		60,238		-		60,238
Corporate debt securities		-		999		-		999
Trust Preferred Securities		-		4,917		-		4,917
Agency mortgage-backed securities		-		51,460		-		51,460
Private-label mortgage-backed securities		-		2,399		-		2,399
Asset-backed securities		-		45		-		45
Total assets	$	2,199	$	132,633	$	-	$	134,832
Liability Description
Interest rate swaps	$	-	$	922	$	-	$	922
Total liabilities	$	-	$	922	$	-	$	922

(Dollars in Thousands)	Fair Value at December 31, 2012
Asset  Description	Level 1		Level 2		Level 3		Total
Equity securities	$	1,941	$	-	$	-	$	1,941
Obligations of U.S. Government agencies		-		12,809		-		12,809
Obligations of state and political subdivisions		-		61,216		-		61,216
Corporate debt securities		-		994		-		994
Trust Preferred Securities		-		4,830		-		4,830
Agency mortgage-backed securities		-		49,066		-		49,066
Private-label mortgage-backed securities		-		2,426		-		2,426
Asset-backed securities		-		46		-		46
Total assets	$	1,941	$	131,387	$	-	$	133,328
Liability Description
Interest rate swaps	$	-	$	1,103	$	-	$	1,103
Total liabilities	$	-	$	1,103	$	-	$	1,103

The Corporation used the following methods and significant assumptions to estimate the fair values for financial assets measured at fair value on a recurring basis.

Investment securities:  Level 1 securities represent equity securities that are valued using quoted market prices from nationally recognized markets. Level 2 securities represent debt securities that are valued using a mathematical model based upon the specific characteristics of a security in relationship to quoted prices for similar securities.    

Interest rate swaps: The interest rate swaps are valued using a discounted cash flow model that uses verifiable market environment inputs to calculate the fair value. This method is not dependent on the input of any significant judgments or assumptions by Management.  

Nonrecurring Fair Value Measurements

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2013 and December 31, 2012 are as follows:

(Dollars in Thousands)
	Fair Value at March 31, 2013
Asset  Description	Level 1		Level 2		Level 3		Total
Impaired loans (1)	$	-	$	-	$	8,262	$	8,262
Other real estate owned (1)		-		-		5,420		5,420
Mortgage servicing rights		-		-		185		185
Total assets	$	-	$	-	$	13,867	$	13,867

(Dollars in Thousands)	Fair Value at December 31, 2012
Asset  Description	Level 1		Level 2		Level 3		Total
Impaired loans (1)	$	-	$	-	$	9,235	$	9,235
Other real estate owned (1)		-		-		5,127		5,127
Mortgage servicing rights		-		-		235		235
Total assets	$	-	$	-	$	14,597	$	14,597

(1) Includes assets directly charged-down to fair value during the year-to-date period.

The Corporation used the following methods and significant assumptions to estimate the fair values for financial assets measured at fair value on a nonrecurring basis.

Impaired loans: Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral.  Collateral values are estimated using Level 3 inputs based on customized discounting criteria. 

Other real estate: The fair value of other real estate, upon initial recognition, is estimated using Level 2 inputs within the fair value hierarchy based on observable market data and Level 3 inputs based on customized discounting criteria.  In connection with the measurement and initial recognition of the foregoing assets, the Corporation recognizes charge-offs through the allowance for loan losses. 

Mortgage servicing rights: The fair value of mortgage servicing rights, upon initial recognition, is estimated using a valuation model that calculates the present value of estimated future net servicing income.  The model incorporates Level 3 assumptions such as cost to service, discount rate, prepayment speeds, default rates and losses. 

The Corporation did not record any liabilities at fair value for which measurement of the fair value was made on a nonrecurring basis at March 31, 2013. For financial assets and liabilities measured at fair value on a recurring basis, there were no transfers of financial assets or liabilities between Level 1 and Level 2 during the period ending March 31, 2013.

The following table presents additional quantitative information about Level 3 assets measured at fair value on a nonrecurring basis:

	Quantitative Information about Level 3 Fair Value Measurements
(Dollars in Thousands)	at March 31, 2013
				Range
Asset  Description	Fair Value	Valuation Technique	Unobservable Input	(Weighted Average)
Impaired loans (1)	$                   8,262	Appraisal	Appraisal Adjustments (2)	0% - 100% (18.2%)
			Cost to sell	5% - 15%  (6.5%)
Other real estate owned (1)	5,420	Appraisal	Appraisal Adjustments (2)
			Cost to sell	8% (8%)
Mortgage servicing rights	185	Discounted Cash Flow (3)
	at December 31, 2012
Impaired loans (1)	$                   9,235	Appraisal	Appraisal Adjustments (2)	0% - 100% (11%)
			Cost to sell	5% - 25%  (7%)
Other real estate owned (1)	5,127	Appraisal	Appraisal Adjustments (2)
			Cost to sell	8% (8%)
Mortgage servicing rights	235	Discounted Cash Flow (3)
(1) Includes assets directly charged-down to fair value during the year-to-date period.
(2) Qualitative adjustments are discounts specific to each asset and are made as needed.
(3) Valuation and inputs are determined by a third-party pricing service without adjustment.