Fair Value

9 Months Ended

Sep. 30, 2012

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

9. Fair Value

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value.

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Corporation has the ability to access at the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as 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.

Level 3: Significant unobservable inputs that reflect the Corporation’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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

The Corporation used the following methods and significant assumptions to estimate fair value:

Cash and cash equivalents – The carrying value of cash, due from banks and interest bearing deposits approximates fair value and are classified as Level 1.

Securities available for sale – The fair value of all investment securities are based upon the assumptions market participants would use in pricing the security. If available, investment securities are determined by quoted market prices (Level 1). Level 1 includes U.S. Treasury and federal agency securities. For investment securities where quoted market prices are not available, fair values are calculated based on market prices on similar securities (Level 2). Level 2 includes U.S. Government sponsored entities and agencies, mortgage-backed securities, collateralized mortgage obligations, state and political subdivision securities and corporate debt securities. For investment securities where quoted prices or market prices of similar securities are not available, fair values are calculated by using unobservable inputs (Level 3).

Loans – The fair value of loans receivable was estimated based on the discounted value of the future cash flows using the current rates being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification.

Impaired loans – At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive a specific allowance for loan losses. For collateral dependent loans, fair value is commonly based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. As of September 30, 2012 the fair value consists of loan balances of $4.1 million, net of a valuation allowance of $1.6 million, compared to loan balances of $652,000, net of a valuation allowance of $164,000 at December 31, 2011. There was $1.4 million and $1.5 million of additional provision for loan losses recorded for impaired loans during the three and nine month periods ended September 30, 2012. There was no additional provision recorded for impaired loans for the same periods in 2011.

Other Real estate owned (OREO) – Assets acquired through or instead of foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. Management’s ongoing review of appraisal information may result in additional discounts or adjustments to the valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. As of September 30, 2012 and December 31, 2011, OREO measured at fair value less costs to sell had a net carrying amount of $45,000, which was made up of the outstanding balance of $50,000 and a write-down of $5,000. At September 30, 2011, OREO measured at fair value less costs to sell had a net carrying amount of $14,000, which was made up of the outstanding balance of $19,000 and a write-down of $5,000.

Appraisals for both collateral-dependent impaired loans and OREO are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed by the Corporation. Once received, management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.

Federal bank stock – It is not practical to determine the fair value of federal bank stocks due to restrictions place on its transferability.

Deposits – The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, checking with interest, savings and money market accounts, is equal to the amount payable on demand resulting in either a Level 1 or Level 2 classification. The fair values of time deposits are based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar maturities resulting in a Level 2 classification.

Borrowings – The fair value of borrowings with the FHLB is estimated using discounted cash flows based on current incremental borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Accrued interest receivable and payable – The carrying value of accrued interest receivable and payable approximates fair value. The fair value classification is consistent with the related financial instrument.

For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy are as follows:

(Dollar amounts in thousands)			(Level 1)		(Level 2)
			Quoted Prices in		Significant		(Level 3)
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
Description	Total		Assets		Inputs		Inputs
September 30, 2012:
U.S. Treasury and federal agency	$	3,981	$	3,981	$	-	$	-
U.S. government sponsored entities and agencies		44,966		-		44,966		-
Mortgage-backed securities: residential		25,175		-		25,175		-
Collateralized mortgage obligations: residential		26,167		-		26,167		-
State and political subdivision		37,399		-		37,399		-
Corporate securities		3,758		-		3,758		-
Equity securities		2,175		1,522		-		653
	$	143,621	$	5,503	$	137,465	$	653
December 31, 2011:
U.S. Treasury and federal agency	$	4,460	$	4,460	$	-	$	-
U.S. government sponsored entities and agencies		41,520		-		41,520
Mortgage-backed securities: residential		37,478		-		37,478		-
State and political subdivision		37,000		-		37,000		-
Equity securities		2,696		1,052		1,644		-
	$	123,154	$	5,512	$	117,642	$	-

The Corporation’s policy is to transfer assets or liabilities from one level to another when the methodology to obtain the fair value changes such that there are more or fewer unobservable inputs as of the end of the reporting period. During the three and nine month periods ended September 30, 2012, the Corporation had no transfers between Level 1 and Level 2 and one transfer between Level 2 and Level 3. Transfers into Level 3 during the periods reflected transfers from Level 2 of certain equity securities due to reduced transparency of market prices as a result of less market activity in these instruments. The following table presents changes in Level 3 assets measured on a recurring basis for the three and nine month periods ended September 30, 2012 and 2011:

(Dollar amounts in thousands)	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Balance at the beginning of the period	$	-	$	-	$	-	$	-
Total gains or losses (realized/unrealized):		-		-		-		-
Included in earnings		-		-		-		-
Included in other comprehensive income		-		-		-		-
Issuances		-		-		-		-
Transfers in and/or out of Level 3		653		-		653		-
Balance at the end of the period	$	653	$	-	$	653	$	-

For assets measured at fair value on a non-recurring basis, the fair value measurements by level within the fair value hierarchy are as follows:

(Dollar amounts in thousands)			(Level 1)		(Level 2)
			Quoted Prices in		Significant		(Level 3)
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
Description	Total		Assets		Inputs		Inputs
September 30, 2012:
Impaired commercial real estate loans	$	2,557	$	-	$	-	$	2,557
Other residential real estate owned		45		-		-		45
	$	2,602	$	-	$	-	$	2,602
December 31, 2011:
Impaired commercial real estate loans	$	382	$	-	$	-	$	382
Impaired commercial business loans		106		-		-		106
Other residential real estate owned		45		-		-		45
	$	533	$	-	$	-	$	533

The following table presents quantitative information about Level 3 fair value measurements for assets measured at fair value on a non-recurring basis as of September 30, 2012:

(Dollar amounts in thousands)	September 30,		Valuation	Unobservable
	2012		Techniques(s)	Input (s)	Range
Impaired commercial real estate loans	$	2,557	Sales comparison approach/ Contractual provision of USDA loan	Adjustment for differences between comparable sales		10% - 100%
Other residential real estate owned		45	Sales comparison approach	Adjustment for differences between comparable sales		10%

Included in impaired commercial real estate loans is a $356,000 loan guaranteed by the United States Department of Agriculture (USDA). The guarantee covers 90% of the principal balance outstanding. In determining the fair value of this loan, the Corporation considered the contractual provisions of the loan and did not rely on the fair value of the underlying collateral. As such, the Corporation applied a 10% discount to the loan which represents the portion of the loan at risk. Also included in impaired commercial real estate loans are two impaired commercial real estate loans totaling $95,000 which were discounted by 100% due to uncertainties surrounding possible bankruptcy court outcomes regarding the Corporation’s collateral lien position. The weighted average discount on impaired commercial real estate loans as of September 30, 2012 was 13%.

The following table sets forth the carrying amount and estimated fair values of the Corporation’s financial instruments included in the consolidated balance sheet as of September 30, 2012 and December 31, 2011:

(Dollar amounts in thousands)			Fair Value Measurements at
	Carrying		September 30, 2012 using:
Description	Amount		Total		Level 1		Level 2		Level 3
September 30, 2012:
Financial Assets:
Cash and cash equivalents	$	23,027	$	23,027	$	23,027	$	-	$	-
Securities available for sale		143,621		143,621		5,503		137,465		653
Loans, net		331,431		337,652		-		-		337,652
Federal bank stock		3,171		N/A		-		-		-
Accrued interest receivable		1,736		1,736		5		584		1,147
		502,986		506,036		28,535		138,049		339,452
Financial Liabilities:
Deposits		453,497		458,617		317,593		141,024		-
FHLB advances		20,000		23,241		-		23,241		-
Accrued interest payable		516		516		59		457		-
		474,013		482,374		317,652		164,722		-

December 31, 2011:	Carrying		Fair
Financial Assets:	Amount		Value
Cash and cash equivalents		28,193		28,193
Securities available for sale		123,154		123,154
Loans, net		312,545		319,967
Federal bank stock		3,664		N/A
Accrued interest receivable		1,630		1,630
		469,186		472,944
Financial Liabilities:
Deposits		416,468		422,704
FHLB advances		20,000		23,362
Accrued interest payable		541		541
		437,009		446,607