Fair Value Of Assets And Liabilities

12 Months Ended

Dec. 31, 2012

Fair Value Of Assets And Liabilities [Abstract]

Fair Value Of Assets And Liabilities

NOTE 3 – FAIR VALUE OF ASSETS AND LIABILITIES

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sale transaction on the dates indicated.  The fair value amounts have been measured as of their respective year ends, and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates.  As such, the fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year end.

Under FASB ASC 820, there is a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value.  The three broad levels defined by the FASB ASC 820 hierarchy are as follows:

Level I - Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II - Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these asset and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

Level III - Assets and liabilities that have little to no pricing observability as of reported date.  These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The following table summarizes the fair value of the Company’s financial assets measured on a recurring basis by the above FASB ASC 820 pricing observability levels as of December 31, 2012 and 2011:

			Quoted Prices in		Significant
			Active Markets		Other		Significant
	Fair		for Identical		Observable		Unobservable
	Value		Assets		Inputs		Inputs
(Dollars in thousands)	Measurements		(Level I)		(Level II)		(Level III)
December 31, 2012:
State and political subdivisions	$	27,741	$	-	$	27,741	$	-
Mortgage-backed securities
U.S. government-sponsored enterprises		90,709		-		90,709		-
Equity securities-financial services industry and other		431		431		-		-
December 31, 2011:
State and political subdivisions	$	20,570	$	-	$	20,570	$	-
Mortgage-backed securities
U.S. government-sponsored enterprises		71,998		-		71,998		-
Private mortgage-backed securities		2,477		-		2,477		-
Equity securities-financial services industry and other		1,279		1,279		-		-

The Company’s available for sale securities portfolio contains investments, which are all rated within the Company’s investment policy guidelines and upon review of the entire portfolio all securities are marketable and have observable pricing inputs.

For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2012 and 2011 are as follows:

			Quoted Prices in		Significant
			Active Markets		Other		Significant
	Fair		for Identical		Observable		Unobservable
	Value		Assets		Inputs		Inputs
(Dollars in thousands)	Measurements		(Level I)		(Level II)		(Level III)
December 31, 2012:
Impaired loans	$	6,239	$	-	$	-	$	6,239
Foreclosed real estate		3,612		-		-		3,612
December 31, 2011:
Impaired loans	$	11,571	$	-	$	-	$	11,571
Foreclosed real estate		4,959		-		-		4,959

The following table presents additional qualitative information about assets measured at fair value on a nonrecurring basis and for which Level 3 inputs were used to determine fair value:

	Qualitative Information about Level 3 Fair Value Measurements
	Fair				Range
	Value		Valuation	Unobservable	(Weighted
(Dollars in thousands)	Estimate		Techniques	Input	Average)
December 31, 2012:
Impaired loans	$	6,239	Appraisal of	Appraisal	0% to -57.1%
			collateral	adjustments (1)	(-21.8%)
				Selling
				expenses (1)	-7.0% (-7.0%)
Foreclosed real estate		3,612	Appraisal of
			collateral
December 31, 2011:
Impaired loans	$	11,571	Appraisal of	Appraisal	0% to -43.9%
			collateral	adjustments (1)	(-2.4%)
				Selling
				expenses (1)	-7.0% (-7.0%)
Foreclosed real estate		4,959	Appraisal of
			collateral
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated selling expenses.  The range and weighted average of selling expenses and other appraisal adjustments are presented as a percent of the appraisal.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.  The following methods and assumptions were used to estimate the fair value of the Company’s financial instruments at December 31, 2012 and 2011:

Cash and Cash Equivalents (Carried at Cost): The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets’ fair value.

Deposits (Carried at Cost): Fair value for fixed-rate time certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.  The Company generally purchases amounts below the insured limit, limiting the amount of credit risk on these time deposits.  

Securities: The fair value of securities, available for sale (carried at fair value) and securities held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level I), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.  For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3).  In the absence of such evidence, management’s best estimate is used.  Management’s best estimate consists of both internal and external support on certain Level 3 measurements.  Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments.

Loans Receivable (Carried at Cost): The fair values of loans are estimated using discounted cash flow analyses, using the market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans.  Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal.  Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Impaired Loans (Carried at Lower of Cost or Fair Value): Impaired loans are those that are accounted for under FASB ASC 310, Accounting by Creditors for Impairment of a Loan, in which the Company has measured impairment generally based on the fair value of the loan’s collateral.  Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds.  These assets are included in Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.  At December 31, 2012 and 2011, the fair value consists of the loan balances of $6.2 million and $13.5 million, net of valuation allowance of $365 thousand and $1.9 million, respectively.  Additional provisions for loan losses were $207 thousand and $1.4 million for the years ended December 31, 2012 and 2011, respectively.

Federal Home Loan Bank Stock (Carried at Cost):  The carrying amount of restricted investment in bank stock approximates fair value and considers the limited marketability of such securities.

Deposit Liabilities (Carried at Cost): The fair values disclosed for demand, savings and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts).  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits. 

Borrowings (Carried at Cost): Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity.  These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party. 

Junior Subordinated Debentures (Carried at Cost): Fair values of junior subordinated debt are estimated using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk characteristics, terms and remaining maturity. 

Accrued Interest Receivable and Accrued Interest Payable (Carried at Cost): The carrying amounts of accrued interest receivable and payable approximate its fair value.

Off-Balance Sheet Instruments (Disclosed at Cost): Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing. 

The fair values of the Company’s financial instruments at December 31, 2012 and 2011 were as follows:

					Quoted Prices in		Significant
					Active Markets		Other		Significant
	December 31, 2012				for Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(Dollars in thousands)	Amount		Value		(Level I)		(Level II)		(Level III)
Financial assets:
Cash and cash equivalents	$	11,668	$	11,668	$	11,668	$	-	$	-
Time deposits with other banks		100		100		100		-		-
Securities available for sale		118,881		118,881		431		118,450		-
Securities held to maturity		5,221		5,472		-		5,472		-
Federal Home Loan Bank stock		1,980		1,980		-		1,980		-
Loans receivable, net of allowance		342,760		353,208		-		-		353,208
Accrued interest receivable		1,741		1,741		-		1,741		-
Financial liabilities:
Non-maturity deposits		328,856		327,096		327,096		-		-
Time deposits		103,580		105,680		-		105,680		-
Borrowings		26,000		29,476		-		29,476		-
Junior subordinated debentures		12,887		6,315		-		6,315		-
Accrued interest payable		273		273		-		273		-

					Quoted Prices in		Significant
					Active Markets		Other		Significant
	December 31, 2011				for Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(Dollars in thousands)	Amount		Value		(Level I)		(Level II)		(Level III)
Financial assets:
Cash and cash equivalents	$	37,500	$	37,500	$	37,500	$	-	$	-
Time deposits with other banks		100		100		100		-		-
Securities available for sale		96,324		96,324		1,316		95,008		-
Securities held to maturity		4,220		4,345		-		4,345		-
Federal Home Loan Bank stock		1,874		1,874		-		1,874		-
Loans receivable, net of allowance		332,495		334,403		-		-		334,403
Accrued interest receivable		1,735		1,735		-		1,735		-
Financial liabilities:
Non-maturity deposits		314,570		314,571		314,571		-		-
Time deposits		110,806		113,527		-		113,527		-
Borrowings		26,000		29,686		-		29,686		-
Junior subordinated debentures		12,887		6,613		-		6,613		-
Accrued interest payable		301		301		-		301		-