Note 6 - Fair Value Measurements

9 Months Ended

Sep. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

6. Fair Value Measurements

ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value, and sets forth disclosures about fair value measurements. ASC Topic 825, “Financial Instruments,” allows entities to choose to measure certain financial assets and liabilities at fair value. The Company has not elected the fair value option for any of its financial assets or liabilities.

ASC Topic 820 defines fair value as the price that would be received to sell 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 at the measurement date. It also 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. This Topic describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices for identical assets or liabilities in active markets that the entity has the ability to access at 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 for substantially the full term of the assets or liabilities.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions supported by little or no market activity, about the assumptions that market participants would use in pricing the asset or liability.

Following is a description of the valuation method used for financial instruments measured at fair value on a recurring basis. For this disclosure, the Company only has available for sale investment securities that meet the requirement.

Available for sale investment securities

Valued primarily by independent third party pricing services under the market valuation approach that include, but are not limited to, the following inputs:

● Mutual funds and equity securities are priced utilizing real-time data feeds from active market exchanges for identical securities and are considered Level 1 inputs.

● Government-sponsored agency debt securities, obligations of states and political subdivisions, mortgage-backed securities, corporate bonds, and other similar investment securities are priced with available market information through processes using benchmark yields, matrix pricing, prepayment speeds, cash flows, live trading data, and market spreads sourced from new issues, dealer quotes, and trade prices, among others sources and are considered Level 2 inputs.

Available for sale investment securities are the Company’s only balance sheet item that meets the disclosure requirements for instruments measured at fair value on a recurring basis. Disclosures as of September 30, 2013 and December 31, 2012 are as follows:

			Fair Value Measurements Using
(In thousands) Available For Sale Investment Securities	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2013
Obligations of U.S. government-sponsored entities	$	96,087	$	-	$	96,087	$	-
Obligations of states and political subdivisions		130,538		-		130,538		-
Mortgage-backed securities – residential		351,749		-		351,749		-
Corporate debt securities		5,776		-		5,776		-
Mutual funds and equity securities		1,903		1,903		-		-
Total	$	586,053	$	1,903	$	584,150	$	-

			Fair Value Measurements Using
(In thousands) Available For Sale Investment Securities	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2012
Obligations of U.S. government-sponsored entities	$	76,095	$	-	$	76,095	$	-
Obligations of states and political subdivisions		118,755		-		118,755		-
Mortgage-backed securities – residential		370,439		-		370,439		-
Corporate debt securities		5,826		-		5,826		-
Mutual funds and equity securities		1,993		1,993		-		-
Total	$	573,108	$	1,993	$	571,115	$	-

The Company is required to measure and disclose certain other assets and liabilities at fair value on a nonrecurring basis in periods following their initial recognition. The Company’s disclosure about assets and liabilities measured at fair value on a nonrecurring basis consists of impaired loans and other real estate owned (“OREO”). The carrying value of these assets are adjusted to fair value on a nonrecurring basis through impairment charges as described more fully below.

Impairment charges on collateral-dependent loans are recorded by either an increase to the provision for loan losses and related allowance or by direct loan charge-offs. The fair value of collateral-dependent impaired loans with specific allocations of the allowance for loan losses is measured based on recent appraisals of the underlying collateral. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraisers take absorption rates into consideration and adjustments are routinely made in the appraisal process to identify differences between the comparable sales and income data available. Such adjustments consist mainly of estimated costs to sell that are not included in certain appraisals or to update appraised collateral values as a result of market declines of similar properties for which a newer appraisal is available. These adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value.

OREO includes properties acquired by the Company through, or in lieu of, actual loan foreclosures and is carried at fair value less estimated costs to sell. Fair value of OREO at acquisition is generally based on third party appraisals of the property that include comparable sales data and are considered as Level 3 inputs. The carrying value of each OREO property is updated at least annually and more frequently when market conditions significantly impact the value of the property. If the carrying amount of the OREO exceeds fair value less estimated costs to sell, an impairment loss is recorded through noninterest expense.

The following tables represent the carrying amount of assets measured at fair value on a nonrecurring basis and still held by the Company as of the dates indicated. The amounts in the tables only represent assets whose carrying amount has been adjusted by impairment charges during the period in a manner as described above; therefore, these amounts will differ from the total amounts outstanding. Collateral-dependent impaired loan amounts in the tables below exclude restructured loans since they are measured based on present value techniques, which are outside the scope of the fair value reporting framework.

			Fair Value Measurements Using
(In thousands) Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2013
Collateral-dependent Impaired Loans
Real estate mortgage – construction and land development	$	335	$	-	$	-	$	335
Real estate mortgage – residential		3,077		-		-		3,077
Real estate mortgage – farmland and other commercial enterprises		3,450		-		-		3,450
Commercial and industrial		88		-		-		88
Total	$	6,950	$	-	$	-	$	6,950
OREO
Construction and land development	$	11,454	$	-	$	-	$	11,454
Residential real estate		1,527		-		-		1,527
Farmland and other commercial enterprises		9,106		-		-		9,106
Total	$	22,087	$	-	$	-	$	22,087

			Fair Value Measurements Using
(In thousands) Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2012
Collateral-dependent Impaired Loans
Real estate mortgage – construction and land development	$	17,921	$	-	$	-	$	17,921
Real estate mortgage – residential		2,273		-		-		2,273
Real estate mortgage – farmland and other commercial enterprises		3,523		-		-		3,523
Commercial and industrial		9		-		-		9
Consumer – secured		4		-		-		4
Consumer – unsecured		113		-		-		113
Total	$	23,843	$	-	$	-	$	23,843
OREO
Construction and land development	$	15,873	$	-	$	-	$	15,873
Residential real estate		1,483		-		-		1,483
Farmland and other commercial enterprises		3,826		-		-		3,826
Total	$	21,182	$	-	$	-	$	21,182

The following table represents impairment charges recorded in earnings for the periods indicated on assets measured at fair value on a nonrecurring basis. 

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2013		2012		2013		2012
Impairment charges:
Collateral-dependent impaired loans	$	448	$	953	$	1,481	$	4,055
OREO		1,698		1,033		3,288		2,046
Total	$	2,146	$	1,986	$	4,769	$	6,101

The following table presents quantitative information about unobservable inputs for assets measured on a nonrecurring basis using Level 3 measurements.

(In thousands)	Fair Value at September 30, 2013		Valuation Technique	Unobservable Inputs	Range			Average
Collateral-dependent impaired loans	$	6,950	Discounted appraisals	Marketability discount	0%	-	6.3%		1.2	%
OREO	$	22,087	Discounted appraisals	Marketability discount	1.1%	-	32.4%		9.4	%

As previously discussed, the fair value of real estate securing collateral-dependent impaired loans and OREO are based on current third party appraisals. It is often necessary, however, for the Company to discount the appraisal amounts supporting its impaired loans and OREO. These discounts relate primarily to marketing and other holding costs that are not included in certain appraisals or to update values as a result of market declines of similar properties for which newer appraisals are available. Discounts also result from contracts to sell properties entered into during the period. The range of discounts is presented in the table above. The upper end of the range identified in the table above relates to outlier transactions. The weighted average column is more of an indicator of the discounts applied to the appraisals.

Fair Value of Financial Instruments

The table that follows represents the estimated fair values of the Company’s financial instruments made in accordance with the requirements of ASC 825, “Financial Instruments.” ASC 825 requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet for which it is practicable to estimate that value. The estimated fair value amounts have been determined by the Company using available market information and present value or other valuation techniques. These derived fair values are subjective in nature, involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. ASC 825 excludes certain financial instruments and all nonfinancial instruments from the disclosure requirements. Accordingly, the aggregate fair value amounts presented are not intended to represent the underlying value of the Company.

The following methods and assumptions were used to estimate the fair value of each of the financial instruments in the table that follows.

Cash and Cash Equivalents, Accrued Interest Receivable, and Accrued Interest Payable

The carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization or settlement.

Investment Securities Held to Maturity

Fair value is based on quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities or with available market information through processes using benchmark yields, matrix pricing, prepayment speeds, cash flows, live trading data, and market spreads sourced from new issues, dealer quotes, and trade prices, among others sources.

Loans

The fair value of loans is estimated by discounting expected future cash flows using current discount rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Expected future cash flows are projected based on contractual cash flows adjusted for estimated prepayments.

Federal Home Loan Bank and Federal Reserve Bank Stock

It is not practical to determine the fair value of Federal Home Loan Bank and Federal Reserve Bank stock due to restrictions placed on its transferability.

Deposit Liabilities

The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date and fair value approximates carrying value. The fair value of fixed maturity certificates of deposit is estimated by discounting the expected future cash flows using the rates currently offered for certificates of deposit with similar remaining maturities.

Federal Funds Purchased and Other Short-term Borrowings

The carrying amount is the estimated fair value for these borrowings which reprice frequently in the near term.

Securities Sold Under Agreements to Repurchase, Subordinated Notes Payable, and Other Long-term Borrowings

The fair value of these borrowings is estimated by discounting the expected future cash flows using rates currently available for debt with similar terms and remaining maturities. For subordinated notes payable, the Company uses its best estimate to determine an appropriate discount rate since active markets for similar debt transactions are very limited.

Commitments to Extend Credit and Standby Letters of Credit

Pricing of these financial instruments is based on the credit quality and relationship, fees, interest rates, probability of funding, compensating balance, and other covenants or requirements. Loan commitments generally have fixed expiration dates, variable interest rates and contain termination and other clauses that provide for relief from funding in the event there is a significant deterioration in the credit quality of the customer. Many loan commitments are expected to, and typically do, expire without being drawn upon. The rates and terms of the Company’s commitments to lend and standby letters of credit are competitive with others in the various markets in which the Company operates. There are no unamortized fees relating to these financial instruments, as such the carrying value and fair value are both zero.

The following table presents the estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2013 and December 31, 2012. Information for available for sale investment securities is presented within this footnote in greater detail above.

					Fair Value Measurements Using
(In thousands)	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2013
Assets
Cash and cash equivalents	$	83,834	$	83,834	$	83,834	$	-	$	-
Held to maturity investment securities		820		871		-		871		-
Loans, net		988,182		985,969		-		-		985,969
Accrued interest receivable		6,033		6,033		-		6,033		-
Federal Home Loan Bank and Federal Reserve Bank Stock		9,516	N/A			-		-		-
Liabilities
Deposits		1,403,485		1,406,295		911,017		-		495,278
Federal funds purchased and other short-term borrowings		32,885		32,885		-		32,885		-
Securities sold under agreements to repurchase and other long-term borrowings		127,165		139,136		-		139,136		-
Subordinated notes payable to unconsolidated trusts		48,970		25,027		-		-		25,027
Accrued interest payable		1,161		1,161		-		1,161		-
December 31, 2012
Assets
Cash and cash equivalents	$	95,855	$	95,855	$	95,855	$	-	$	-
Held to maturity investment securities		820		956		-		956		-
Loans, net		980,550		979,301		-		-		979,301
Accrued interest receivable		6,074		6,074		-		6,074		-
Federal Home Loan Bank and Federal Reserve Bank Stock		9,516	N/A			-		-		-
Liabilities
Deposits		1,410,810		1,414,395		870,145		-		544,250
Federal funds purchased and other short-term borrowings		24,083		24,083		-		24,083		-
Securities sold under agreements to repurchase and other long-term borrowings		129,297		148,680		-		148,680		-
Subordinated notes payable to unconsolidated trusts		48,970		21,015		-		-		21,015
Accrued interest payable		1,370		1,370		-		1,370		-