Fair Value Measurements

6 Months Ended

Jun. 30, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

Note 8. Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topics of FASB ASU 2010-06 and FASB ASU 2011-04, the fair value of a financial instrument is the price that would be received in the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value can be a reasonable point within a range that is most representative of fair value under current market conditions.

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

CASH AND CASH EQUIVALENTS

The carrying amounts of cash and short-term instruments, including interest-bearing due from banks, approximate fair values.

INVESTMENT SECURITIES

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Securities are classified as Level 2 if quoted market prices are not available. Fair value is estimated using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes and credit spreads. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified in Level 3.

RESTRICTED SECURITIES

The restricted security category is comprised of FHLB and FRB stock. These stocks are classified as restricted securities because their ownership is restricted to certain types of entities and they lack a market. Therefore, the carrying amounts of restricted securities approximate fair value.

LOANS RECEIVABLE

For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial 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. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

BANK-OWNED LIFE INSURANCE

Bank-owned life insurance represents insurance policies on certain officers of the Company. The cash value of the policies is estimated using information provided by the insurance carrier. These policies are carried at their cash value, which approximates the fair value.

DEPOSIT LIABILITIES

The fair value of demand deposits, savings and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposits is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.

SHORT-TERM BORROWINGS

The carrying amounts of federal funds purchased, overnight repurchase agreements, and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.

LONG-TERM BORROWINGS

The fair values of the Company's long-term borrowings are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.

ACCRUED INTEREST

The carrying amounts of accrued interest approximate fair value.

COMMITMENTS TO EXTEND CREDIT AND IRREVOCABLE LETTERS OF CREDIT

The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit-worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At June 30, 2012 and December 31, 2011, the fair value of fees charged for loan commitments and irrevocable letters of credit was immaterial.

FAIR VALUE HIERARCHY

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally 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.

Level 1 -  Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 -  Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The estimated fair values, and related carrying or notional amounts, of the Company's financial instruments as of the dates indicated are as follows:

			Fair Value Measurements at June 30, 2012 Using
			(in thousands)
	Carrying Value		Quoted Prices in  Active Markets  for Identical  Assets (Level 1)		Significant Other  Observable  Inputs (Level 2)		Significant  Unobservable  Inputs (Level 3)
Assets
Cash and cash equivalents	$	35,958	$	35,958	$	0	$	0
Securities available-for-sale		295,795		0		295,795		0
Securities held-to-maturity		615		0		621		0
Restricted securities		3,110		0		3,110		0
Loans, net of allowances for loan losses		468,819		0		471,549		427
Bank owned life insurance		22,043		0		22,043		0
Accrued interest receivable		2,289		0		2,289		0
Liabilities
Deposits	$	724,176	$	0	$	725,297	$	0
Overnight repurchase agreements		22,764		0		22,764		0
Term repurchase agreements		1,176		0		1,178		0
Federal Home Loan Bank advances		35,000		0		38,997		0
Accrued interest payable		564		0		564		0

			Fair Value Measurements at December 31, 2011 Using
			(in thousands)
	Carrying Value		Quoted Prices in  Active Markets  for Identical  Assets (Level 1)		Significant Other  Observable  Inputs (Level 2)		Significant  Unobservable  Inputs (Level 3)
Assets
Cash and cash equivalents	$	24,855	$	24,855	$	0	$	0
Securities available-for-sale		236,599		0		236,599		0
Securities held-to-maturity		1,515		0		1,526		0
Restricted securities		3,451		0		3,451		0
Loans, net of allowances for loan losses		511,829		0		514,875		230
Bank owned life insurance		21,593		0		21,593		0
Accrued interest receivable		2,528		0		2,528		0
Liabilities
Deposits	$	690,879	$	0	$	692,539	$	0
Overnight repurchase agreements		35,001		0		35,001		0
Term repurchase agreements		1,480		0		1,481		0
Federal Home Loan Bank advances		35,000		0		39,341		0
Accrued interest payable		577		0		577		0

ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS

Debt and equity securities with readily determinable fair values are classified as "available-for-sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. 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). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Company's available-for-sale securities are considered to be Level 2 securities.

The following table presents the balances of certain financial assets measured at fair value on a recurring basis as of the dates indicated:

			Fair Value Measurements at June 30, 2012 Using
			(in thousands)
Description	Balance		Quoted Prices in Active Markets  for Identical  Assets (Level 1)		Significant Other  Observable  Inputs (Level 2)		Significant  Unobservable  Inputs (Level 3)
Available-for-sale securities
Obligations of  U.S. Government agencies	$	41,840	$	0	$	41,840	$	0
Obligations of state and political subdivisions		27,484		0		27,484		0
Mortgage-backed securities		224,878		0		224,878		0
Money market investments		1,593		0		1,593		0
Total available-for-sale securities	$	295,795	$	0	$	295,795	$	0

			Fair Value Measurements at December 31, 2011 Using
			(in thousands)
Description	Balance		Quoted Prices in  Active Markets  for Identical  Assets (Level 1)		Significant Other  Observable  Inputs (Level 2)		Significant  Unobservable  Inputs (Level 3)
Available-for-sale securities
U.S. Treasury securities	$	250	$	0	$	250	$	0
Obligations of  U.S. Government agencies		119,554		0		119,554		0
Obligations of state and political subdivisions		12,261		0		12,261		0
Mortgage-backed securities		103,228		0		103,228		0
Money market investments		1,306		0		1,306		0
Total available-for-sale securities	$	236,599	$	0	$	236,599	$	0

ASSETS MEASURED AT FAIR VALUE ON A NONRECURRING BASIS

Under certain circumstances, adjustments are made to the fair value for assets and liabilities although they are not measured at fair value on an ongoing basis.

Impaired loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business' financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as part of the provision for loan losses on the Consolidated Statements of Income.

Foreclosed assets

Loans are transferred to foreclosed assets when the collateral securing them is foreclosed on. The measurement of loss associated with foreclosed assets is based on the fair value of the collateral compared to the unpaid loan balance and anticipated costs to sell the property. If there is a contract for the sale of a property, and management reasonably believes the transaction will be consummated in accordance with the terms of the contract, fair value is based on the sale price in that contract (Level 1). Lacking such a contract, the value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. Any fair value adjustments to foreclosed assets are recorded in the period incurred and expensed against current earnings.

The following table presents the financial instruments carried on the consolidated balance sheets by caption and by level in the fair value hierarchy for which a nonrecurring change in fair value has been recorded as of the dates indicated:

			Carrying Value at June 30, 2012
			(in thousands)
Description	Fair Value		Quoted Prices in  Active Markets for  Identical Assets (Level 1)		Significant Other  Observable Inputs (Level 2)		Significant  Unobservable  Inputs (Level 3)
Assets:
Impaired loans	$	3,562	$	0	$	3,135	$	427
Foreclosed assets	$	7,232	$	0	$	7,232	$	0

			Carrying Value at December 31, 2011
			(in thousands)
Description	Fair Value		Quoted Prices in  Active Markets for Identical Assets (Level 1)		Significant Other  Observable Inputs (Level 2)		Significant  Unobservable  Inputs (Level 3)
Assets:
Impaired loans	$	2,802	$	0	$	2,572	$	230
Foreclosed assets	$	9,390	$	0	$	9,390	$	0

The following table displays quantitative information about Level 3 Fair Value Measurements as of the date indicated (dollars in thousands):

	Quantitative Information About Level 3 Fair Value Measurements at June 30, 2012
	Fair Value		Valuation Techniques	Unobservable Input	Range (Average)
Assets
Impaired Loans	$	427	Discounted collateral value	Selling costs		0% - 10%	(6%)

The following table summarizes activity at the Level 3 valuation for the period shown:

Six months ended June 30, 2012
	(in thousands)
Balance as of December 31, 2011	$	230
Transfers in to Level 3		427
Changes in loan balances due to payments		0
Loans no longer considered impaired *		(230	)
Ending balance	$	427

* Includes loans charged down during the quarter to the net realizable value of the collateral