Fair Value of Assets and Liabilities

6 Months Ended

Jun. 30, 2013

Fair Value of Assets and Liabilities

Fair Value of Assets and Liabilities

Note 2.  Fair Value of Assets and Liabilities

Recurring Basis

The following table provides a summary of the financial instruments the Company measures at fair value on a recurring basis:

	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
(dollar amounts in thousands)	Identical Assets		Inputs		Inputs		Assets At
June 30, 2013	(Level 1)		(Level 2)		(Level 3)		Fair Value
Assets
Obligations of U.S. government agencies	$	-	$	4,804	$	-	$	4,804
Mortgage backed securities:
Agency	-		145,977		-		145,977
Non-agency	-		20,415		-		20,415
Obligations of state and municipal securities	-		34,393		-		34,393
Asset backed securities	-		31,951		-		31,951
Total assets measured on a recurring basis	$	-	$	237,540	$	-	$	237,540
December 31, 2012
Assets
Obligations of U.S. government agencies	$	-	$	7,567	$	-	$	7,567
Mortgage backed securities:
Agency	-		145,768		-		145,768
Non-agency	-		44,795		-		44,795
Obligations of state and municipal securities	-		68,968		-		68,968
Asset backed securities			20,584		-		20,584
Total assets measured on a recurring basis	$	-	$	287,682	$	-	$	287,682

In determining the fair value of Level 3 instruments on a recurring basis the Company takes into consideration several variables, including but not limited to expectations about interest rate movements, prepayment speeds of the underlying mortgages for mortgage backed securities, expected default rates, and credit spreads over the risk free rate.  Of these variables, default rates and credit spreads are perhaps the least observable and most impactful on the long-term value of a Level 3 security.  Since a bond’s value is represented by its yield which reflects the risk-free yield curve plus compensation for various risks incurred in buying the bond, changes to the risk assumptions including probability of default and timing of future cash flows can materially impact the market value.

As of June 30, 2013 and December 31, 2012, there were no Level 3 instruments. There were also no changes in the balance sheet carrying value associated with recurring Level 3 financial instruments for the three and six months ended June 30, 2013.  The following table provides a summary of the 2012 changes in balance sheet carrying values associated with recurring Level 3 financial instruments:

						Purchases,
	Beginning		Gain / (Loss)			Issuances, and		Sales and		Transfers to / (from)			Ending
(dollar amounts in thousands)	Balance		Included in OCI (1)			Settlements		Maturities		Level III			Balance
For the three months ended
June 30, 2012
Obligations of state and municipal securities	$	260	$	2		$	-	$	-	$	-		$	262
Agency mortgage backed securities	4,483		-			-		-		(4,483		)	-
						Purchases,
	Beginning		Gain / (Loss)			Issuances, and		Sales and		Transfers to / (from)			Ending
(dollar amounts in thousands)	Balance		Included in OCI (1)			Settlements		Maturities		Level III			Balance
For the six months ended
June 30, 2012
Obligations of state and municipal securities	$	259	$	3		$	-	$	-	$	-		$	262
Agency mortgage baked securities	-		(191		)	4,674		-		(4,483		)	-
Non-agency mortgage backed securities	3,074		-			-		-		(3,074		)	-

(1) Realized or unrealized gains from the changes in values of Level 3 financial instruments represent gains from changes in values of financial instruments only for the period(s) in which the instruments were classified as Level 3.

The assets presented under Level 3 of the fair value hierarchy, which are classified as obligations of state and municipal subdivisions, represent available for sale investment securities in the form of certificates of participation, where an active market for such securities is not currently available.

Non-recurring Basis

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a non-recurring basis.  These include assets and liabilities that are measured at the lower of cost or fair value that were recognized at fair value which was below cost.   Certain impaired loans measured at fair value at December 31, 2012 are no longer recorded at fair value due to borrower payments reducing the carrying value of these loans to less than fair value and due to other impaired loans now being evaluated under the discounted cash flow method versus the collateral method.  The discounted cash flow method as prescribed by Topic 310 is not a fair value measurement since the discount rate utilized is the loan’s effective interest rate, which is not a market rate. The discounted cash flow approach was determined to be the most appropriate impairment method to use for these impaired loans based on their significant payment history and the global cash flow analysis performed on each borrower.

The following table provides a summary of assets the Company measures at fair value on a non-recurring basis:

	Fair Value Measurements Using
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
(dollar amounts in thousands)	Identical Assets		Inputs		Inputs		Assets At		Total
June 30, 2013	(Level 1)		(Level 2)		(Level 3)		Fair Value		Losses
Assets
Impaired loans
Residential 1 to 4 family	$	-	$	-	$	340	$	340	$	23
Commercial and industrial	-		-		65		65		970
Agriculture	-		-		167		167		320
Land	-		-		3,023		3,023		113
Total assets measured on a non-recurring basis	$	-	$	-	$	3,596	$	3,596	$	1,426
December 31, 2012
Assets
Impaired loans
Commercial and industrial	$	-	$	820	$	213	$	1,033	$	1,941
Agriculture	-		72		-		72		28
Construction	-		1,656		-		1,656		460
Land	-		-		2,048		2,048		3,802
Total assets measured on a non-recurring basis	$	-	$	2,548	$	2,261	$	4,809	$	6,231

There were no transfers in or out of Level 1 and Level 2 for assets reported at fair value on either a recurring and non-recurring basis during the three and six months ended June 30, 2013 and 2012.

Fair Value of Financial Instruments

The following table provides a summary of the estimated fair value of financial instruments:

			Fair Value Measurements Using
			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
(dollar amounts in thousands)	Carrying		Identical Assets		Inputs		Inputs
June 30, 2013	Amount		(Level 1)		(Level 2)		(Level 3)		Fair Value
Assets
Cash and cash equivalents	$	38,539	$	38,539	$	-	$	-	$	38,539
Investment securities available for sale	237,540		-		237,540		-		237,540
Federal Home Loan Bank stock	4,739		-		-		-		N/A
Loans receivable, net of deferred fees and costs	745,239		-		-		754,466		754,466
Loans held for sale	9,786		-		9,786		-		9,786
Accrued interest receivable	3,634		-		1,071		2,563		3,634
Liabilities
Non-interest bearing deposits	287,098		287,098		-		-		287,098
Interest bearing deposits	596,231		-		597,471		-		597,471
Federal Home Loan Bank advances	52,500		-		50,632		-		50,632
Junior subordinated debentures	8,248		-		-		7,289		7,289
Accrued interest payable	203		-		203		-		203
December 31, 2012
Assets
Cash and cash equivalents	$	34,116	$	34,116	$	-	$	-	$	34,116
Investments and mortgage-backed securities	287,682		-		287,682		-		287,682
Federal Home Loan Bank stock	4,575		-		-		-		N/A
Loans receivable, net of deferred fees and costs	688,671		-		2,548		701,144		703,692
Loans held for sale	22,549		-		22,549		-		22,549
Accrued interest receivable	3,915		-		1,497		2,418		3,915
Liabilities
Non interest-bearing deposits	273,242		273,242		-		-		273,242
Interest-bearing deposits	597,628		-		598,664		-		598,664
Federal Home Loan Bank advances	66,500		-		67,059		-		67,059
Junior subordinated debentures	8,248		-		-		7,078		7,078
Accrued interest payable	192		-		192		-		192

Information on off-balance sheet instruments follows:

	June 30, 2013				December 31, 2012
	Notional		Cost to Cede		Notional		Cost to Cede
(dollar amounts in thousands)	Amount		or Assume		Amount		or Assume
Off-balance sheet instruments, commitments to extend credit and standby letters of credit	$	192,884	$	1,929	$	178,432	$	1,784