Note 8 - Fair Value Measurements

3 Months Ended

Mar. 31, 2013

Fair Value Disclosures [Text Block]

8.  Fair Value Measurements

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. ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes 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 in active exchange markets for identical assets or liabilities; also includes certain U.S. Treasury and other U.S. government and agency securities actively traded in over-the-counter markets.

Level 2 Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data.  This category generally includes certain U.S. government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale.

Level 3 Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations.

Assets and Liabilities Recorded as Fair Value on a Recurring Basis

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012.

(dollars in thousands)	Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total (Fair Value)
March 31, 2013
Investment securities available for sale:
U. S. Government agency securities	$	-	$	40,124	$	-	$	40,124
Residential mortgage backed securities		-		191,578		-		191,578
Municipal bonds		-		86,380		-		86,380
Other equity investments		120		-		229		349
Residential mortgage loans held for sale		-		132,698		-		132,698
Total assets measured at fair value on a recurring basis as of March 31, 2013	$	120	$	450,780	$	229	$	451,129

(dollars in thousands)	Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total (Fair Value)
December 31, 2012
Investment securities available for sale:
U. S. Government agency securities	$	-	$	49,082	$	-	$	49,082
Residential mortgage backed securities		-		173,083		-		173,083
Municipal bonds		-		77,313		-		77,313
Other equity investments		112		-		230		342
Residential mortgage loans held for sale		-		226,923		-		226,923
Total assets measured at fair value on a recurring basis as of December 31, 2012	$	112	$	526,401	$	230	$	526,743

Investment Securities Available-for-sale

Investment securities available-for-sale is 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 value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 investment securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include US government agency debt securities, mortgage backed securities issued by government sponsored entities and municipal bonds. Securities classified as Level 3 include securities in less liquid markets. The Company’s residential loans held for sale are reported on an aggregate basis at the lower of cost or fair value.

The following is a reconciliation of activity for assets measured at fair value based on significant unobservable (non-market) information.

	Other Equity Investments
(dollars in thousands)	March 31, 2013		December 31, 2012
Balance, beginning of period	$	226	$	226
Total realized and unrealized gains and losses:
Included in other comprehensive income		3		4
Purchases		-		-
Principal redemption		-		-
Balance, end of period	$	229	$	230

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 GAAP. 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. There are no liabilities which the Company measures at fair value on a nonrecurring basis.  Assets measured at fair value on a nonrecurring basis are included in the table below:

(dollars in thousands)	Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total (Fair Value)
March 31, 2013
Impaired loans:
Commercial	$	-	$	4,553	$	3,440	$	7,993
Investment - commercial real estate		-		3,459		1,948		5,407
Owner occupied - commercial real estate		-		6,449		-		6,449
Real estate mortgage - residential		-		-		691		691
Construction - commercial and residential		-		11,995		9,964		21,959
Home equity		-		481		-		481
Other consumer		-		-		-		-
Other real estate owned		-		5,449		3,750		9,199
Total assets measured at fair value on a nonrecurring basis as of    March 31, 2013	$	-	$	32,386	$	19,793	$	52,179

(dollars in thousands)	Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total (Fair Value)
December 31, 2012
Impaired loans:
Commercial	$	-	$	5,198	$	4,050	$	9,248
Investment - commercial real estate		-		3,924		1,676		5,600
Owner occupied - commercial real estate		-		6,452		207		6,659
Real estate mortgage - residential		-		-		699		699
Construction - commercial and residential		-		12,937		10,298		23,235
Home equity		-		510		3		513
Other consumer		-		-		43		43
Other real estate owned		-		4,969		330		5,299
Total assets measured at fair value on a nonrecurring basis as of    December 31, 2012	$	-	$	33,990	$	17,306	$	51,296

Loans

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 loss 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 are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 310, “Receivables,” the fair value of impaired loans may be estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, and liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At March 31, 2013, substantially all of the impaired loans were evaluated based upon the fair value of the collateral. In accordance with ASC Topic 820, 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 or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.

The Company discloses fair value information about financial instruments for which it is practicable to estimate the value, whether or not such financial instruments are recognized on the balance sheet. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by quoted market price, if one exists.

Quoted market prices, if available, are shown as estimates of fair value. Because no quoted market prices exist for a portion of the Company’s financial instruments, the fair value of such instruments has been derived based on management’s assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net realizable value could be materially different from the estimates presented below. In addition, the estimates are only indicative of individual financial instrument values and should not be considered an indication of the fair value of the Company taken as a whole.

The following methods and assumptions were used to estimate the fair value of each category of financial instrument for which it is practicable to estimate value:

Cash due from banks and federal funds sold: The carrying amount approximates the fair values at the reporting date.

Interest bearing deposits with other banks: The carrying amount approximates the fair values at the reporting date.

Investment securities: For these instruments, fair values are based upon quoted prices, if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

Federal Reserve and Federal Home Loan Bank stock: The carrying amount approximates the fair values at the reporting date.

Loans held for sale: Fair values are at the carrying value (lower of cost or market) since such loans are typically committed to be sold (servicing released) at a profit.

Loans: For variable rate loans that re-price on a scheduled basis, fair values are based on carrying values.  The fair value of the remaining loans are estimated by discounting the estimated future cash flows using the current interest rate at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term.

Other earning assets: The fair value of bank owned life insurance is the current cash surrender value which is the carrying value.

Noninterest bearing deposits: The fair value of these deposits is the amount payable on demand at the reporting date, since generally accepted accounting standards do not permit an assumption of core deposit value.

Interest bearing deposits: The fair value of interest bearing transaction, savings, and money market deposits with no defined maturity is the amount payable on demand at the reporting date, since generally accepted accounting standards do not permit an assumption of core deposit value.

Certificates of deposit: The fair value of certificates of deposit is estimated by discounting the future cash flows using the current rates at which deposits with a similar remaining term would be accepted.

Customer repurchase agreements and federal funds purchased: The carrying amount approximates the fair values at the reporting date.

Borrowings: The carrying amount for variable rate borrowings approximates the fair values at the reporting date. The fair value of fixed rate Federal Home Loan Bank advances and the subordinated notes are estimated by computing the discounted value of contractual cash flows payable at current interest rates for obligations with similar remaining terms. The fair value of variable rate Federal Home Loan Bank advances is estimated to be carrying value since these liabilities are based on a spread to a current pricing index.

Off-balance sheet items: Management has reviewed the unfunded portion of commitments to extend credit, as well as standby and other letters of credit, and has determined that the fair value of such instruments is equal to the fee, if any, collected and unamortized for the commitment made.

The estimated fair values of the Company’s financial instruments at March 31, 2013 and December 31, 2012 are as follows:

					Fair Value Measurements
					Quoted Prices in Active Markets for Identical Assets or Liabilities		Significant Other Observable Inputs		Significant  Unobservable Inputs
(dollars in thousands)	Carrying Value		Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2013
Assets
Cash and due from banks	$	7,123	$	7,123	$	-	$	7,123	$	-
Federal funds sold		5,811		5,811		-		5,811		-
Interest bearing deposits with other banks		257,957		257,957		-		257,957		-
Investment securities		318,431		318,431		120		318,082		229
Federal Reserve and Federal Home Loan Bank stock		11,154		11,154		-		11,154		-
Loans held for sale		132,698		132,698		-		132,698		-
Loans		2,548,024		2,589,295		-		26,937		2,562,358
Other earning assets		14,229		14,229		-		14,229		-
Liabilities
Noninterest bearing deposits		756,177		756,177		-		756,177		-
Interest bearing deposits		2,056,753		2,057,317		-		2,057,317		-
Borrowings		131,964		133,909		-		133,909		-
December 31, 2012
Assets
Cash and due from banks	$	7,439	$	7,439	$	-	$	7,439	$	-
Federal funds sold		7,852		7,852		-		7,852		-
Interest bearing deposits with other banks		324,043		324,043		-		324,043		-
Investment securities		299,820		299,820		112		299,478		230
Federal Reserve and Federal Home Loan Bank stock		10,694		10,694		-		10,694		-
Loans held for sale		226,923		226,923		-		226,923		-
Loans		2,493,095		2,515,409		-		29,021		2,486,388
Other earning assets		14,135		14,135		-		14,135		-
Liabilities
Noninterest bearing deposits		881,390		881,390		-		881,390		-
Interest bearing deposits		2,015,832		2,017,623		-		2,017,623		-
Borrowings		140,638		142,765		-		142,765		-