Fair Value

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. Generally accepted accounting principles regarding fair value measurements, establish a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of 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, and other inputs that are observable or can be corroborated by observable market data.

Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value. The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter and based on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects changes in classifications between levels will be rare.

Securities: Investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Level 1 securities include those traded on nationally recognized securities exchanges, U.S. Treasury securities, and money market funds. Level 2 securities include U.S. Agency securities, mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Loans: Other than the Company’s Held For Sale portfolio, the Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

At March 31, 2014, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price, the Company records the impaired loan as nonrecurring Level 2. The Company records the impaired loan as nonrecurring Level 3 in the following instances: (i) when the fair value of the collateral is based upon current appraised value less estimated selling or liquidation costs; (ii) when an appraised value is not available, or (iii) when management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price.

Foreclosed assets: Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at net realizable value. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price, the Company records the foreclosed asset as nonrecurring Level 2. The Company records the value of foreclosed assets as nonrecurring Level 3 in the following instances: (i) when the fair value of the collateral is based upon current appraised value less estimated selling or liquidation costs; (ii) when an appraised value is not available, or (iii) when management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price.

Derivatives: Derivatives are recorded at fair value on a recurring basis. Third party vendors compile prices from various sources and may determine the fair value of identical or similar instruments by using pricing models that consider observable market data (Level 2).

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013 are summarized below:



In thousands
March 31, 2014	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale:
U.S. Government and federal agency	$	13,331	$	0	$	13,331	$	0
Government-sponsored enterprises	31,853		0		31,853		0
Mortgage-backed securities	85,323		0		85,323		0
Collateralized mortgage obligations	10,763		0		10,763		0
State and political subdivisions	39,384		0		39,384		0
Held for sale loans	996		0		996		0
Interest rate swaps	97		0		97		0
Total assets at fair value	$	181,747	$	0	$	181,747	$	0

Interest rate swaps	97		0		97		0
Total liabilities at fair value	$	97	$	0	$	97	$	0

December 31, 2013
Investment securities available-for-sale:
U.S. Government and federal agency	$	10,307	$	0	$	10,307	$	0
Government-sponsored enterprises	31,311		0		31,311		0
Mortgage-backed securities	72,389		0		72,389		0
Collateralized mortgage obligations	9,194		0		9,194		0
State and political subdivisions	36,660		0		36,660		0
Held for sale loans	245		0		245		0
Interest rate swaps	174		0		174		0
Total assets at fair value	$	160,280	$	0	$	160,280	$	0

Interest rate swaps	174		0		174		0
Total liabilities at fair value	$	174	$	0	$	174	$	0

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis as of March 31, 2014 and December 31, 2013 are included in the tables below:



In thousands
March 31, 2014	Total		Level 1		Level 2		Level 3
Impaired Loans:
Commercial	$	2,243	$	0	$	0	$	2,243
Residential Real Estate	338		0		0		338
Construction Real Estate	287		0		0		287
Consumer	$	5	$	0	$	0	$	5
Total Impaired Loans	$	2,873	$	0	$	0	$	2,873
Foreclosed Assets	19,766		0		0		19,766
Total assets at fair value	$	22,639	$	0	$	0	$	22,639

Total liabilities at fair value	$	0	$	0	$	0	$	0



December 31, 2013
Impaired Loans:
Commercial	$	384	$	0	$	0	$	384
Residential Real Estate	343		0		0		343
Construction Real Estate	2,074		0		0		2,074
Consumer	$	5	$	0	$	0	$	5
Total Impaired Loans	$	2,806	$	0	$	0	$	2,806
Foreclosed Assets	19,705		0		0		19,705
Total assets at fair value	$	22,511	$	0	$	0	$	22,511

Total liabilities at fair value	$	0	$	0	$	0	$	0

For level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2014, the significant unobservable inputs used in the fair value measurements were as follows:



	Fair Value at March 31, 2014		Valuation Technique	Significant Unobservable Inputs	Significant Unobservable Input Value
Impaired Loans	$	2,873	Discounted appraised value	Discount for selling costs and age of appraisals	15% - 55%
Foreclosed Assets	$	19,766	Discounted appraised value	Discount for selling costs and age of appraisals	15% - 55%

Accounting standards for financial instruments require disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. 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 estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. These accounting standards exclude certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The methodologies for estimating fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The estimated fair value approximates carrying value for cash and cash equivalents, accrued interest and the cash surrender value of life insurance policies. The methodologies for other financial assets and liabilities are discussed below:

Loans: For variable-rate loans that re-price frequently and with no significant changes in credit risk, fair values are based on carrying values. The fair values for other loans were estimated using discounted cash flow analysis, using interest rates currently being offered. An overall valuation adjustment is made for specific credit risks as well as general portfolio credit risk.

Deposit liabilities: The fair values disclosed for demand and savings deposits are, by definition, equal to the amount payable on demand at the reporting date. The fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated contractual maturities on such time deposits.

Short-term borrowings: The carrying amounts of federal funds purchased, borrowings under 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 analysis on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Federal Home Loan Bank of Atlanta advances: The fair values of the Company’s Federal Home Loan Bank of Atlanta advances are estimated using discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Junior Subordinated Debentures: The values of the Company’s junior subordinated debentures are variable rate instruments that reprice on a monthly and/or quarterly basis; therefore, carrying value is adjusted for the one or three month repricing lag in order to approximate fair value.

Off-Balance-Sheet Financial Instruments: The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness 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 stand-by 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 March 31, 2014, the fair value of loan commitments and stand-by letters of credit was immaterial.



March 31, 2014	Carrying Amounts		Approximate Fair Value		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
In thousands
Financial assets
Securities held-to-maturity	$	21,507	$	22,193	$	0	$	22,193	$	0
Loans, net	578,332		585,260		0		0		585,260

Financial liabilities
Time deposits/IRAs	189,068		190,428		0		190,428		0
FHLB borrowings	63,000		65,511		0		65,511		0
Junior subordinated debentures	27,446		26,860		0		26,860		0



December 31, 2013
Financial assets
Securities held-to-maturity	$	21,992	$	22,471	$	0	$	22,471	$	0
Loans, net	563,160		569,355		0		0		569,355

Financial liabilities
Time deposits/IRAs	158,840		160,297		0		160,297		0
FHLB borrowings	43,000		45,530		0		45,530		0
Junior subordinated debentures	27,476		26,907		0		26,907		0