Fair Value of Assets and Liabilities

3 Months Ended

Mar. 31, 2013

Fair Value of Assets and Liabilities [Abstract]

Fair Value Measurements And Fair Values Of Financial Instruments

Note 13—Fair Value of Assets and Liabilities

The Corporation uses its best judgment in estimating the fair value of the Corporation's assets and liabilities; however, there are inherent weaknesses in any estimation technique. Therefore, the fair value estimates herein are not necessarily indicative of the amounts that could be realized in sales transactions on the dates indicated. The estimated fair value amounts have been measured as of their respective period-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 subsequent to the respective reporting dates may be different than the amounts reported at each period end.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date. GAAP establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

Level 2: Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that utilize model-based techniques for which all significant assumptions are observable in the market.

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement; inputs to the valuation methodology that utilize model-based techniques for which significant assumptions are not observable in the market; or inputs to the valuation methodology that require significant management judgment or estimation, some of which may be internally developed.

Since management maximizes the use of observable inputs and minimizes the use of unobservable inputs when determining fair value, 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. Management reviews and updates the fair value hierarchy classifications on a quarterly basis.

Assets Measured at Fair Value on a Recurring Basis

Securities available-for-sale

The fair values of investment securities were measured using information from a third-party pricing service. The pricing service uses quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique, used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted prices. At least annually, the Corporation reviews a random sample of the pricing information received from the third-party pricing service by comparing it to price quotes from third-party brokers. Historically, price deviations have been immaterial.

	Fair Value Measurements
(dollars in thousands)	Total		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Other Unobservable Inputs
March 31, 2013
Securities available-for-sale:
U.S. Treasury notes	$	3,523	$	3,523	$	0	$	0
U.S. agency		35,973		0		35,973		0
U.S. agency mortgage-backed, residential		80,072		0		80,072		0
State and municipal		102,209		0		102,209		0
December 31, 2012
Securities available-for-sale:
U.S. Treasury notes	$	5,032	$	5,032	$	0	$	0
U.S. agency		38,058		0		38,058		0
U.S. agency mortgage-backed, residential		88,233		0		88,233		0
State and municipal		102,739		0		102,739		0

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired loans
Impaired loans are those that are accounted for under FASB ASC Topic 310, in which the Corporation has measured impairment generally based on the fair value of the loan's collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These loans are included as Level 3 fair values, based on the lowest level of input that is significant to the fair value measurements. At March 31, 2013, the fair value consists of loan balances of $4,256,000, net of valuation allowances of $1,032,000 and charge-offs of $2,587,000, compared to loan balances of $4,493,000, net of valuation allowances of $1,162,000 and charge-offs of $2,605,000, at December 31, 2012.

Foreclosed Real Estate
Other real estate property acquired through foreclosure is initially recorded at fair value of the property at the transfer date less estimated selling cost. Subsequently, other real estate owned is carried at the lower of its carrying value or the fair value less estimated selling cost. Fair value is usually determined based upon an independent third-party appraisal of the property or occasionally upon a recent sales offer. At March 31, 2013, the carrying value of foreclosed real estate with valuation allowances was $2,661,000 ($6,372,000 less $3,711,000 of allowances). At December 31, 2012, the carrying value of foreclosed real estate with valuation allowances was $2,779,000 ($6,491,000 less $3,712,000 of allowances).

	Fair Value Measurements
(dollars in thousands)	Total		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Other Unobservable Inputs
March 31, 2013
Impaired loans	$	4,256	$	0	$	0	$	4,256
Foreclosed real estate		2,661		0		0		2,661
December 31, 2012
Impaired loans	$	4,493	$	0	$	0	$	4,493
Foreclosed real estate		2,779		0		0		2,779

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Corporation has utilized Level 3 inputs to determine fair value:

	Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands)	Fair Value Estimate		Valuation Techniques			Unobservable Input			Range
March 31, 2013
Impaired loans	$	4,256		Appraisal (1	)		Appraisal adjustments (2	)		20% - 30	%
Foreclosed real estate		2,661		Appraisal (1), (3	)
Decenber 31, 2012
Impaired loans	$	4,493		Appraisal (1	)		Appraisal adjustments (2	)		20% - 30	%
Foreclosed real estate		2,779		Appraisal (1), (3	)

(1)	Fair value is generally determined through independent appraisals, which generally include various level 3 inputs that are not identifiable.
(2)	Appraisals may be adjusted downward by the Corporation's management for qualitative factors such as economic conditions, and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
(3)	May include qualitative adjustments by the Corporation's management and estimated liquidation expenses.

Disclosures about Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of the Corporation's financial instruments as of March 31, 2013 and December 31, 2012:

Cash and cash equivalents
The carrying amount is a reasonable estimate of fair value.

Securities available for sale
The fair value of securities available for sale is determined in accordance with the methods described under FASB ASC Topic 820 as described above.

Restricted investment in bank stocks
The carrying amount of restricted investment in bank stocks is a reasonable estimate of fair value. The Corporation is required to maintain minimum investment balances in these stocks, which are not actively traded and therefore have no readily determinable market value.

Loans held for sale
The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices. If no such quoted prices exist, the fair value of a loan is determined using quoted prices for a similar loan or loans, adjusted for the specific attributes of that loan.

Loans, net
The fair value of non-impaired loans is estimated using discounted cash flow analyses using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans were first segregated by type such as commercial, real estate, and consumer, and were then further segmented into fixed and variable rate. Projected future cash flows are calculated based upon contractual maturity or call dates. Generally, variable rate loans that reprice frequently have no significant change in credit risk; fair value is based on carrying value.

Interest receivable
The carrying value of interest receivable is a reasonable estimate of fair value.

Deposits
The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair values of time deposits are estimated using a discounted cash flow analyses. The discount rates used are based on rates currently offered for deposits with similar remaining maturities. The fair values of variable rate time deposits that reprice frequently are based on carrying value. The fair values of time deposit liabilities do not take into consideration the value of the Corporation's long-term relationships with depositors, which may have significant value.

Short-term borrowings
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Long-term debt
Long-term debt includes FHLB advances (Level 2) and junior subordinated debt (Level 3). The fair value of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices are obtained from this active market and represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party. The fair value of junior subordinated debt is estimated using discounted cash flow analysis, based on market rates and spread characteristics of similar debt with similar credit risk characteristics, terms and remaining maturity.

Interest payable
The carrying value of interest payable is a reasonable estimate of fair value.

Off-balance sheet instruments
Off-balance sheet instruments consist of lending commitments and letters of credit are based on fees currently charged in the market to enter into similar arrangements, taking into account the remaining terms of the agreements and counterparties' credit standing. These amounts were not considered material.

The following presents the carrying amounts and estimated fair values of the Corporation's financial instruments as of March 31, 2013 and December 31, 2012.

					Fair Value Estimates
					(Level 1)		(Level 2)		(Level 3)
(dollars in thousands)	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Other Unobservable Inputs
March 31, 2013
Financial assets
Cash and cash equivalents	$	36,926	$	36,926	$	36,926	$	0	$	0
Securities available-for-sale		221,777		221,777		3,523		218,254		0
Restricted investment in bank stocks		3,084		3,084		0		3,084		0
Loans held for sale		2,622		2,675		0		2,675		0
Loans, net		750,128		776,915		0		0		776,915
Interest receivable		3,521		3,521		0		3,521		0
Financial liabilities
Deposits	$	893,182	$	898,423	$	0	$	898,423	$	0
Short-term borrowings		19,243		19,243		0		19,243		0
Long-term debt		40,650		36,325		0		31,059		5,266
Interest payable		429		429		0		429		0
Off-balance sheet instruments		0		0		0		0		0
December 31, 2012
Financial assets
Cash and cash equivalents	$	49,757	$	49,757	$	49,757	$	0	$	0
Securities available-for-sale		234,062		234,062		5,032		229,030		0
Restricted investment in bank stocks		2,863		2,863		0		2,863		0
Loans held for sale		3,091		3,151		0		3,151		0
Loans, net		727,832		753,299		0		0		753,299
Interest receivable		3,579		3,579		0		3,579		0
Financial liabilities
Deposits	$	901,307	$	907,439	$	0	$	907,439	$	0
Short-term borrowings		19,356		19,356		0		19,356		0
Long-term debt		30,815		26,568		0		21,289		5,279
Interest payable		470		470		0		470		0
Off-balance sheet instruments		0		0		0		0		0