Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE

v2.4.0.8
FAIR VALUE
 3 Months Ended
Mar. 31, 2014
FAIR VALUE [Abstract]  
FAIR VALUE
NOTE 5 – FAIR VALUE

ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value include:

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; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Investment Securities: The fair values of investment securities are determined by matrix pricing, which is a mathematical technique widely used 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 2 inputs).  The fair values of certain securities held to maturity are determined by computing discounted cash flows using observable and unobservable market inputs (Level 3 inputs).

Loans Held for Sale: The fair value of loans held for sale is based upon binding quotes from third party investors (Level 2 inputs).

Impaired Loans: Loans identified as impaired are measured using one of three methods: the loan’s observable market price, the fair value of collateral or the present value of expected future cash flows.  For each period presented, no impaired loans were measured using the loan’s observable market price.  If an impaired loan has had a chargeoff or if the fair value of the collateral is less than the recorded investment in the loan, we establish a specific reserve and report the loan as nonrecurring Level 3.  The fair value of collateral of impaired loans is generally based on recent 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 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.

Other Real Estate Owned: Other real estate owned (OREO) properties are initially recorded at fair value, less estimated costs to sell when acquired, establishing a new cost basis.  Adjustments to OREO are measured at fair value, less costs to sell. Fair values are generally based on third party appraisals or realtor evaluations of the property. These appraisals and evaluations 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 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.  In cases where the carrying amount exceeds the fair value, less estimated costs to sell, an impairment loss is recognized through a valuation allowance, and the property is reported as nonrecurring Level 3.

Interest Rate Swaps:   For interest rate swap agreements, we measure fair value utilizing pricing provided by a third-party pricing source that uses market observable inputs, such as forecasted yield curves, and other unobservable inputs and accordingly, interest rate swap agreements are classified as Level 3.

Assets measured at fair value on a recurring basis are summarized below (in thousands):

 
  
Fair
    
Quoted Prices in Active Markets for Identical Assets
    
Significant Other Observable
    
Significant Unobservable Inputs
  
 
  
Value
    
(Level 1)
    
Inputs (Level 2)
    
(Level 3)
  
March 31, 2014
  
   
   
   
 
U.S. Treasury and federal agency securities
  
$
62,559
    
$
---
    
$
62,559
    
$
---
  
U.S. Agency MBS and CMOs
    
18,897
      
---
      
18,897
      
---
  
Tax-exempt state and municipal bonds
    
31,482
      
---
      
31,482
      
---
  
Taxable state and municipal bonds
    
25,889
      
---
      
25,889
      
---
  
Corporate bonds and other debt securities
    
13,026
      
---
      
13,026
      
---
  
Other equity securities
    
1,474
      
---
      
1,474
      
---
  
Loans held for sale
    
194
      
---
      
194
      
---
  
Interest rate swaps
    
132
      
---
      
---
      
132
  
Interest rate swaps
    
(132
)
    
---
      
---
      
(132
)
 
                                
December 31, 2013
                                
U.S. Treasury and federal agency securities
  
$
54,439
    
$
---
    
$
54,439
    
$
---
  
U.S. Agency MBS and CMOs
    
19,365
      
---
      
19,365
      
---
  
Tax-exempt state and municipal bonds
    
26,849
      
---
      
26,849
      
---
  
Taxable state and municipal bonds
    
26,328
      
---
      
26,328
      
---
  
Corporate bonds and other debt securities
    
11,212
      
---
      
11,212
      
---
  
Other equity securities
    
1,466
      
---
      
1,466
      
---
  
Loans held for sale
    
1,915
      
---
      
1,915
      
---
  
Interest rate swaps
    
94
      
---
      
---
      
94
  
Interest rate swaps
    
(94
)
    
---
      
---
      
(94
)

Assets measured at fair value on a non-recurring basis are summarized below (in thousands):

 
  
Fair
    
Quoted Prices in Active Markets for Identical Assets
    
Significant Other Observable
    
Significant Unobservable Inputs
  
 
  
Value
    
(Level 1)
    
Inputs (Level 2)
    
(Level 3)
  
March 31, 2014
  
   
   
   
 
Impaired loans
  
$
21,891
    
$
---
    
$
---
    
$
21,891
  
Other real estate owned
    
27,095
      
---
      
---
      
27,095
  
 
                                
December 31, 2013
                                
Impaired loans
  
$
22,403
    
$
---
    
$
---
    
$
22,403
  
Other real estate owned
    
29,711
      
---
      
---
      
29,711
  

The carrying amounts and estimated fair values of financial instruments, not previously presented, were as follows at March 31, 2014 and December 31, 2013 (dollars in thousands).

Level in
  
March 31, 2014
    
December 31, 2013
  
 
Fair Value
  
Carrying
    
Fair
    
Carrying
    
Fair
  
 
Hierarchy
  
Amount
    
Value
    
Amount
    
Value
  
Financial assets
 
  
   
   
   
 
Cash and due from banks
Level 1
  
$
34,615
    
$
34,615
    
$
38,714
    
$
38,714
  
Cash equivalents
Level 2
    
92,668
      
92,668
      
118,178
      
118,178
  
Interest-bearing time deposits in other financial institutions
Level 2
    
32,500
      
32,466
      
25,000
      
25,003
  
Securities held to maturity
Level 3
    
19,175
      
19,143
      
19,248
      
19,278
  
FHLB stock
 
    
11,236
    
NA
      
11,236
    
NA
  
Loans, net
Level 2
    
987,837
      
979,068
      
999,176
      
990,084
  
Bank owned life insurance
Level 3
    
27,671
      
27,671
      
27,517
      
27,517
  
Accrued interest receivable
Level 2
    
3,511
      
3,511
      
3,231
      
3,231
  
 
 
                                
Financial liabilities
 
                                
Deposits
Level 2
    
(1,216,778
)
    
(1,217,640
)
    
(1,249,734
)
    
(1,250,886
)
Other borrowed funds
Level 2
    
(88,774
)
    
(89,227
)
    
(89,991
)
    
(90,321
)
Long-term debt
Level 2
    
(41,238
)
    
(35,091
)
    
(41,238
)
    
(35,098
)
Subordinated debt
Level 2
    
---
      
---
      
---
      
---
  
Accrued interest payable
Level 2
    
(314
)
    
(314
)
    
(308
)
    
(308
)
 
 
                                
Off-balance sheet credit-related items
 
                                
Loan commitments
 
    
---
      
---
      
---
      
---
  

The methods and assumptions used to estimate fair value are described as follows.

Carrying amount is the estimated fair value for cash and cash equivalents, bank owned life insurance, accrued interest receivable and payable, demand deposits, short-term borrowings and variable rate loans or deposits that reprice frequently and fully. Security fair values are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities as discussed above. For fixed rate loans, interest-bearing time deposits in other financial institutions, or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk (including consideration of widening credit spreads). Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. The fair value of off-balance sheet credit-related items is not significant.