Fair Value

3 Months Ended

Mar. 31, 2012

Fair Value [Abstract]

Fair Value

Fair Value

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

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.

The Company used the following methods and significant assumptions to estimate the fair value:

Investment Securities: The Company used a third party service to estimate fair value on available for sale securities on a monthly basis. This service provider is considered a leading evaluation pricing service for U.S. domestic fixed income securities. They subscribe to multiple third-party pricing vendors, and supplement that information with matrix pricing methods. The fair values for investment securities are determined by quoted market prices in active markets, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on quoted prices for similar assets in active markets, quoted prices for similar assets in markets that are not active or inputs other than quoted prices, which provide a reasonable basis for fair value determination. Such inputs may include interest rates and yield curves, volatilities, prepayment speeds, credit risks and default rates. Finally, inputs used are derived principally from observable market data (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). The fair values of Level 3 investment securities are determined by using unobservable inputs to measure fair value of assets for which there is little, if any market activity at the measurement date, using reasonable inputs and assumptions based on the best information at the time, to the extent that inputs are available without undue cost and effort by the Company’s Controller and Chief Financial Officer. For the period ended March 31, 2012 the fair value of Level 3 investment securities was immaterial.

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans fair value is commonly 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. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair values are commonly based on recent real estate appraisals. These appraisals may use 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 independent 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.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial and commercial real estate properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Appraisal Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with via independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what adjustments should be made to appraisals to arrive at fair value.

Assets measured at fair value on a recurring basis, including financial assets for which the Company has elected the fair value option, are summarized below:

			Fair Value Measurements at March 31, 2012 Using:
	Carrying		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In Thousands of Dollars)	Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Investment securities available-for sale
U.S. Treasury and U.S. government sponsored entities	$	56,142	$	0	$	56,142	$	0
State and political subdivisions		81,675		0		81,675		0
Corporate bonds		1,252		0		1,252		0
Mortgage-backed securities-residential		236,497		0		236,485		12
Collateralized mortgage obligations		35,808		0		35,808		0
Small business administration		302		0		302		0
Equity securities		333		333		0		0
Total investment securities	$	412,009	$	333	$	411,664	$	12

			Fair Value Measurements at December 31, 2011 Using:
	Carrying		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In Thousands of Dollars)	Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Investment securities available-for sale
U.S. Treasury and U.S. government sponsored entities	$	55,988	$	0	$	55,988	$	0
State and political subdivisions		82,690		0		82,690		0
Corporate bonds		769		0		769		0
Mortgage-backed securities-residential		222,718		0		222,706		12
Collateralized mortgage obligations		37,222		0		37,222		0
Small business administration		315		0		315		0
Equity securities		327		327		0		0
Total investment securities	$	400,029	$	327	$	399,690	$	12

There were no significant transfers between Level 1 and Level 2 during the three month periods ended March 31, 2012 and 2011.

The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

	Investment Securities Available-for-sale (Level 3)
	Three Months Ended March 31,
(In Thousands of Dollars)	2012		2011
Beginning balance	$	12	$	12
Total unrealized gains or losses:
Included in other comprehensive income or loss		0		0
Repayments		0		0
Transfer in and/or out of Level 3		0		0
Ending balance	$	12	$	12

Assets measured at fair value on a non-recurring basis are summarized below:

	Fair Value Measurements at March 31, 2012 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In Thousands of Dollars)	Carrying Value		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Impaired loans
Commercial real estate
Owner occupied	$	2,002	$	0	$	0	$	2,002
Non-owner occupied		2,086		0		0		2,086
Other		212		0		0		212
Commercial		42		0		0		42
Other real estate owned
Commercial real estate		270		0		0		270
1 — 4 family residential		20		0		0		20

	Fair Value Measurements at December 31, 2011 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(In Thousands of Dollars)	Carrying Value		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Impaired loans
Commercial real estate
Owner occupied	$	1,606	$	0	$	0	$	1,606
Non-owner occupied		2,017		0		0		2,017
Other		0		0		0		0
Commercial		41		0		0		41
Other real estate owned
Commercial real estate		270		0		0		270
1 — 4 family residential		76		0		0		76

Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $5.3 million with a valuation allowance of $1.0 million at March 31, 2012, resulting in an additional provision for loan losses of $81 thousand for the three month period. At December 31, 2011, impaired loans had a principal balance of $4.6 million, with a valuation allowance of $936 thousand. Provision for loan losses was $300 thousand for the three months ended March 31, 2011, for loans carried at fair value. Excluded from the fair value of impaired loans, at March 31, 2012 and December 31, 2011, discussed above are $2.4 million and $2.3 million of loans classified as troubled debt restructurings, which are not carried at fair value.

Impaired commercial real estate loans, both owner occupied and non-owner occupied are valued by independent external appraisals. These external appraisals are prepared using the sales comparison approach and income approach valuation techniques. Management makes subsequent unobservable adjustments to the impaired loan appraisals by reducing the appraised collateral value in the 0%—40% range, with a weighted average percentage of 21.7%. Impaired loans other than commercial real estate and other real estate owned are not considered material.

Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $290 thousand at March 31, 2012. The Company sold two other real estate owned properties during the three month period ended March 31, 2012. The Company did not record any adjustments to the carrying amount of other real estate owned for the three months ended March 31, 2012. At December 31, 2011, other real estate owned had a net carrying amount of $346 thousand. During the year ended December 31, 2011 five properties were charged down reflecting updated appraisals which resulted in a write-down of $115 thousand.

The carrying amounts and estimated fair values of financial instruments, at March 31, 2012 and December 31, 2011 are as follows:

			Fair Value Measurements at March 31, 2012 Using:
(In Thousands of Dollars)	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	68,575	$	13,833	$	54,742	$	0	$	68,575
Securities available-for-sale		412,009		333		411,664		12		412,009
Restricted stock		4,224		n/a		n/a		n/a		n/a
Loans held for sale		3,195		0		3,256		0		3,256
Loans, net		567,181		0		0		578,273		578,273
Accrued interest receivable		4,021		0		1,305		2,716		4,021
Financial liabilities
Deposits		886,593		630,774		262,012		0		892,786
Short-term borrowings		89,918		0		89,918		0		89,918
Long-term borrowings		10,652		0		12,037		0		12,037
Accrued interest payable		573		6		567		0		573

.

(In Thousands of Dollars) December 31, 2011	Carrying Amount		Fair Value
Financial assets
Cash and cash equivalents	$	52,422	$	52,422
Securities available-for-sale		400,029		400,029
Restricted stock		4,224		n/a
Loans held for sale		677		677
Loans, net		561,986		574,391
Accrued interest receivable		3,794		3,794
Financial liabilities
Deposits		840,125		846,412
Short-term borrowings		98,088		98,088
Long-term borrowings		11,263		12,719
Accrued interest payable		585		585

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

Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2. The Company has determined that cash on hand and non-interest due from bank accounts are Level 1 whereas interest bearing fed funds sold and other are Level 2.

Restricted Stock: It is not practical to determine the fair value of restricted stock due to restrictions placed on its transferability.

Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Loans held for sale: The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

Accrued Interest Receivable/Payable: The carrying amounts of accrued interest receivable and payable approximate fair value resulting in a Level 2 or Level 3 classification. The classification is the result of the association with securities, loans and deposits.

Deposits: The fair values disclosed for demand deposits – interest and non-interest checking, passbook savings, and money market accounts—are, by definition, equal to the amount payable on demand at the reporting date resulting in a Level 1 classification. The carrying amounts of variable rate certificates of deposit approximate their fair values at the reporting date resulting Level 2 classification. Fair value for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Short-term Borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

Long-term Borrowings: The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Off-balance Sheet Instruments: The fair value of commitments is not material.