Fair Value

3 Months Ended

Mar. 31, 2013

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, federal agency securities and certain equity 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) and may include certain equity securities held by the Corporation. The Level 3 equity security valuations were supported by an analysis prepared by the Corporation which relies on inputs such as the security issuer’s publicly attainable financial information, multiples derived from prices in observed transactions involving comparable businesses and other market, financial and nonfinancial factors.

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. 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. 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 March 31, 2013 the fair value of impaired loans consists of loan balances of $4.0 million, net of a valuation allowance of $1.4 million, compared to loan balances of $4.1 million, net of a valuation allowance of $1.4 million at December 31, 2012. There was $5,000 of additional provision for loan losses recorded for impaired loans during the three month period ended March 31, 2013. There was $64,000 of additional provision recorded for impaired loans for the same period in 2012.

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 March 31, 2013, OREO measured at fair value less costs to sell had a net carrying amount of $44,000, which was made up of the outstanding balance of $68,000 and write-downs of $24,000, compared to 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 December 31, 2012 and March 31, 2012.

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. On an annual basis, the Corporation compares the actual selling price of OREO that has been sold to the most recent appraisal to determine what additional adjustment should be made to the appraisal value to arrive at fair value. The most recent analysis performed indicated that a discount of 10% should be applied.

Federal bank stock – It is not practical to determine the fair value of federal bank stocks due to restrictions placed 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
March 31, 2013:
U.S. Treasury and federal agency	$	4,947	$	4,947	$	-	$	-
U.S. government sponsored entities and agencies		26,608		-		26,608		-
Mortgage-backed securities: residential		18,951		-		18,951		-
Collateralized mortgage obligations: residential		23,649		-		23,649		-
State and political subdivision		36,341		-		36,341		-
Corporate debt securities		3,516		-		3,516		-
Equity securities		2,423		1,770		-		653
	$	116,435	$	6,717	$	109,064	$	653
December 31, 2012:
U.S. Treasury and federal agency	$	3,967	$	3,967	$	-	$	-
U.S. government sponsored entities and agencies		28,162		-		28,162		-
Mortgage-backed securities: residential		22,724		-		22,724		-
Collateralized mortgage obligations: residential		22,475		-		22,475		-
State and political subdivision		36,765		-		36,765		-
Corporate debt securities		3,761		-		3,761		-
Equity securities		2,352		1,699		-		653
	$	120,206	$	5,666	$	113,887	$	653

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 month period ended March 31, 2013, the Corporation had no transfers between levels. The following table presents changes in Level 3 assets measured on a recurring basis for the three month periods ended March 31, 2013 and 2012:

(Dollar amounts in thousands)	Three Months Ended
	March 31,
	2013		2012
Balance at the beginning of the period	$	653	$	-
Total gains or losses (realized/unrealized):		-		-
Included in earnings		-		-
Included in other comprehensive income		-		-
Issuances		-		-
Transfers in and/or out of Level 3		-		-
Balance at the end of the period	$	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
March 31, 2013:
Impaired commercial real estate loans	$	2,634	$	-	$	-	$	2,634
Other residential real estate owned		44		-		-		44
	$	2,678	$	-	$	-	$	2,678
December 31, 2012:
Impaired commercial real estate loans	$	2,620	$	-	$	-	$	2,620
Other residential real estate owned		45		-		-		45
	$	2,665	$	-	$	-	$	2,665

The following table presents quantitative information about Level 3 fair value measurements for assets measured at fair value on a non-recurring basis:

(Dollar amounts in thousands)			Valuation	Unobservable
			Techniques(s)	Input (s)	Range
March 31, 2013:
Impaired commercial real estate loans	$	2,634	Sales comparison approach/ Contractual provision of USDA loan	Adjustment for differences between comparable sales	10% - 25%
Other residential real estate owned		44	Sales comparison approach	Adjustment for differences between comparable sales	10%
December 31, 2012:
Impaired commercial real estate loans		2,620	Sales comparison approach/ Contractual provision of USDA loan	Adjustment for differences between comparable sales	10% - 25%
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 loan guaranteed by the United States Department of Agriculture (USDA) with balances of $353,000 and $354,000,.respectively, as of March 31, 2013 and December 31, 2012. 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. The weighted average discount on impaired commercial real estate loans as of March 31, 2013 and December 31, 2012 was 11%.

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 March 31, 2013 and December 31, 2012:

(Dollar amounts in thousands)

	Carrying		Fair Value Measurements using:
Description	Amount		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	23,445	$	23,445	$	23,445	$	-	$	-
Securities available for sale		116,435		116,435		6,717		109,064		653
Loans, net		339,192		347,138		-		-		347,138
Federal bank stock		2,817		N/A		N/A		N/A		N/A
Accrued interest receivable		1,704		1,704		38		459		1,207
		483,593		488,722		30,201		109,523		348,998
Financial Liabilities:
Deposits		437,238		440,669		315,435		125,234		-
FHLB advances		20,000		22,169		-		22,169		-
Accrued interest payable		388		388		5		383		-
		457,626		463,226		315,440		147,786		-

	Carrying		Fair Value Measurements using:
	Amount		Total		Level 1		Level 2		Level 3
December 31, 2012:
Financial Assets:
Cash and cash equivalents	$	20,424	$	20,424	$	20,424	$	-	$	-
Securities available for sale		120,206		120,206		5,666		113,887		653
Loans, net		333,801		340,840		-		-		340,840
Federal bank stock		2,885		N/A		N/A		N/A		N/A
Accrued interest receivable		1,533		1,533		23		383		1,127
		478,849		483,003		26,113		114,270		342,620
Financial Liabilities:
Deposits		432,459		436,279		300,805		135,474		-
FHLB advances		20,000		22,613		-		22,613		-
Accrued interest payable		442		442		55		387		-
		452,901		459,334		300,860		158,474		-