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Fair Value Measurements
9 Months Ended
Sep. 30, 2012
Fair Value Measurements [Abstract]  
Fair Value Measurements

Note 10 – Fair Value Measurements

 

Fair value is defined as the exchange 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. Fair value estimates are based on quoted market prices, if available, quoted market prices of similar assets or liabilities, or the present value of expected future cash flows, and other valuation techniques. There are certain assumptions made in the valuation process and Management uses its best judgment in estimating the fair value of the Corporation'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 Corporation could have realized in a sales transaction on the dates indicated.

 

 

Fair Value Hierarchy

 

Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures, established a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC Topic 820 are as follows:

 

Level 1: Valuation is based on unadjusted, quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.

Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

 

Level 3: Valuation is generated from model based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Corporation's assumptions regarding what market participants would assume when pricing a financial instrument.

 

An asset's or liability's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

The following methods and assumptions were used to estimate the fair values of the Corporation's financial instruments at September 30, 2012 and December 31, 2011:

 

Cash and cash equivalents: For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

 

Investment securities available for sale: The fair value of securities available-for-sale which are measured on a recurring basis are determined primarily by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely 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 similar securities. These securities are classified within Level 1 or 2 of the fair value hierarchy as appropriate. There may be substantial differences in the assumptions used for securities within the same level. For example, prices for U.S. Agency securities have fewer assumptions and are closer to Level 1 valuations than the private label mortgage backed securities that require more assumptions and are closer to Level 3 valuations.

 

Restricted stock: The carrying value of restricted stock approximates its fair value based on redemption provisions for the restricted stock.

 

Net loans (excluding held for sale): The fair value of fixed-rate loans is estimated for each major type of loan (e.g. real estate, commercial, industrial and agricultural and consumer) by discounting the future cash flows associated with such loans using rates currently offered for loans with similar terms to borrowers of comparable credit quality. The model considers scheduled principal maturities, repricing characteristics, prepayment assumptions and interest cash flows. The discount rates used are estimated based upon consideration of a number of factors including the treasury yield curve, expense and service charge factors. For variable rate loans that reprice frequently and have no significant change in credit quality, carrying values approximate the fair value.

 

Loans held for sale: The fair value of loans held for sale is determined by the price set between the Bank and the purchaser prior to origination. These loans are usually sold at par.

 

Accrued interest receivable: The carrying amount is a reasonable estimate of fair value.

 

Mortgage servicing rights: The fair value of mortgage servicing rights is based on observable market prices when available or the present value of expected future cash flows when not available. Assumptions used to calculate the present value include loan default rates, costs to service, and prepayment speeds. These inputs are provided by a third-party pricing service without adjustment. Mortgage servicing rights are carried at the lower of cost or fair value.

 

Deposits: The fair value of demand deposits, savings accounts, and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-rate certificates of deposit is estimated by discounting the future cash flows using rates approximating those currently offered for certificates of deposit with similar remaining maturities.

 

Securities sold under agreement to repurchase: These variable rate liabilities are priced on a short-term market interest rate. Therefore, the carrying value is a reasonable estimate of the fair value.

 

Long-term debt: The fair value of long-term debt is estimated by discounting the future cash flows using rates approximating those currently offered for borrowings with similar remaining maturities.

 

Accrued interest payable: The carrying amount is a reasonable estimate of fair value.

 

Interest rate swaps: The interest rate swaps are valued using a discounted cash flow model that uses verifiable market environment inputs to calculate the fair value. This method is not dependent on the input of any significant judgments or assumptions by Management.  

 

                     
The fair value of the Corporation's financial instruments are as follows:                
    September 30, 2012
    Carrying   Fair    Fair Value Measurements
(Dollars in thousands)   Amount   Value   Level 1   Level 2   Level 3
                     
Financial assets:                    
     Cash and cash equivalents  

 $      104,217

 

 $          104,217

 

 $        104,217

 

 $                     -

 

 $                -

     Investment securities available for sale   

134,321

 

134,321

 

               1,968

 

             132,353

 

                   -

     Restricted stock  

             4,104

 

                 4,104

 

                       -

 

                 4,104

 

                   -

     Loans held for sale  

991

 

991

 

                       -

 

                    991

 

                   -

     Net loans  

742,483

 

759,691

 

                       -

 

                        -

 

       759,691

     Accrued interest receivable  

3,638

 

3,638

 

               3,638

 

                        -

 

                   -

     Mortgage servicing rights  

252

 

252

 

                       -

 

                        -

 

              252

                     
Financial liabilities:                    
     Deposits  

 $      857,826

 

 $          860,007

 

 $        666,189

 

 $          193,818

 

 $                -

     Securities sold under agreements to repurchase  

56,151

 

56,151

 

             56,151

 

                      -  

 

                   -

     Long-term debt  

37,922

 

39,682

 

                     -  

 

               39,682

 

                   -

     Accrued interest payable  

577

 

577

 

                  577

 

                      -  

 

                   -

     Interest rate swaps  

1,284

 

1,284

 

                     -  

 

                 1,284

 

                   -

                     
    December 31, 2011            
    Carrying   Fair             
(Dollars in thousands)   Amount   Value            
                     
Financial assets:                    
     Cash and cash equivalents  

 $        34,144

 

 $            34,144

           
     Investment securities available for sale   

125,301

 

125,301

           
     Restricted stock  

             5,022

 

                 5,022

 

         
     Net loans  

756,687

 

765,707

 

         
     Accrued interest receivable  

3,391

 

3,391

           
     Mortgage servicing rights  

368

 

368

           
                     
Financial liabilities:                    
     Deposits  

$787,986

 

$790,887

 

         
     Securities sold under agreements to repurchase  

53,103

 

53,103

 

         
     Long-term debt  

48,336

 

51,015

 

 

       
     Accrued interest payable  

561

 

561

 

         
     Interest rate swaps  

1,738

 

1,738

 

         

 

Recurring Fair Value Measurements

 

                     
For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy are as follows:
         
(Dollars in Thousands)   Fair Value at September 30, 2012    
Asset  Description   Level 1   Level 2   Level 3   Total    
Equity securities  

 $          1,968

 

 $                     -

 

 $                    -

 

 $              1,968

   
U.S. Government agency securities  

                     -

 

               13,096

 

                       -

 

               13,096

   
Municipal securities  

                     -

 

               61,271

 

                       -

 

               61,271

   
Corporate debt securities  

                     -

 

                    985

 

                       -

 

                    985

   
Trust Preferred Securities  

                     -

 

                 4,701

 

                       -

 

                 4,701

   
Agency mortgage-backed securities  

                     -

 

               49,743

 

                       -

 

               49,743

   
Private-label mortgage-backed securities  

                     -

 

                 2,509

 

                       -

 

                 2,509

   
Asset-backed securities  

                     -

 

                      48

 

                       -

 

                      48

   
  Total assets  

 $          1,968

 

 $          132,353

 

 $                    -

 

 $          134,321

   
                     
Liability Description                    
Interest rate swaps  

 $                  -

 

 $              1,284

 

 $                    -

 

 $              1,284

   
  Total liabilities  

 $                  -

 

 $              1,284

 

 $                    -

 

 $              1,284

 

 

                     
                     
(Dollars in Thousands)   Fair Value at December 31, 2011    
Asset  Description   Level 1   Level 2   Level 3   Total    
Equity securities  

 $          1,759

 

 $                     -

 

 $                    -

 

 $              1,759

   
U.S. Government agency securities  

                     -

 

               13,229

 

                       -

 

               13,229

   
Municipal securities  

                     -

 

               45,081

 

                       -

 

               45,081

   
Corporate debt securities  

                     -

 

                 2,414

 

                       -

 

                 2,414

   
Trust Preferred Securities  

                     -

 

                 4,618

 

                       -

 

                 4,618

   
Agency mortgage-backed securities  

                     -

 

               55,285

 

                       -

 

               55,285

   
Private-label mortgage-backed securities  

                     -

 

                 2,867

 

                       -

 

                 2,867

   
Asset-backed securities  

                     -

 

                      48

 

                       -

 

                      48

   
  Total assets  

 $          1,759

 

 $          123,542

 

 $                    -

 

 $          125,301

   
                     
Liability Description                    
Interest rate swaps  

 $                  -

 

 $              1,738

 

 $                    -

 

 $              1,738

   
  Total liabilities  

 $                  -

 

 $              1,738

 

 $                    -

 

 $              1,738

   

 

 

                   

 

For financial assets and liabilities measured at fair value on a recurring basis, there were no transfers of assets or liabilities between Level 1 and Level 2 during the period ending September 30, 2012.

The methods and significant assumptions used to estimate the fair value for assets and liabilities measured on a recurring basis are the same as previously presented for the same asset or liability.


Nonrecurring Fair Value Measurements

                     
For financial assets and liabilities measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy are as follows:
                     
(Dollars in Thousands)   Fair Value at September 30, 2012    
Asset  Description   Level 1   Level 2   Level 3   Total    
Impaired loans (1)    $                  -    $                     -    $          10,404    $            10,404    
Other real estate owned (1)                        -                           -                  6,165                    6,165    
Mortgage servicing rights                        -                           -                     252                       252    
                     
  Total assets    $                  -    $                     -    $          16,821    $            16,821    
                     
     
(Dollars in Thousands)   Fair Value at December 31, 2011    
Asset  Description   Level 1   Level 2   Level 3   Total    
Impaired loans (1)    $                  -    $                     -    $          13,705    $            13,705    
Other real estate owned (1)                        -                           -                  3,224                    3,224    
Mortgage servicing rights                        -                           -                     368                       368    
  Total assets    $                  -    $                     -    $          17,297    $            17,297    
                     
(1) Includes assets directly charged-down to fair value during the year-to-date period            

 

The Corporation used the following methods and significant assumptions to estimate the fair value of assets and liabilities measured on a nonrecurring basis:

 

Impaired loans: Impaired loans are carried at the lower of cost or the fair value of the collateral for collateral-dependent loans. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The use of independent appraisals, costs to sell, and management's best judgment are significant inputs in arriving at the fair value measure of the underlying collateral and impaired loans are therefore classified within the Level 3 of the fair value hierarchy. Appraisals may be adjusted for qualitative factors such as economic conditions, and liquidation expenses. Appraisal adjustments reflect discounts that are specific to each credit.

 

Other real estate owned: Other real estate owned is carried at the lower of the investment in the asset or the fair value less estimated costs to sell. The fair value of other real estate owned is generally determined through independent appraisals of the underlying collateral, which generally included various Level 3 inputs. Appraisals may be adjusted for qualitative factors such as economic conditions or other factors Management believes are relevant to a specific asset.

 

Mortgage servicing rights: The fair value of mortgage servicing rights is estimated using a valuation model that calculates the present value of estimated future net servicing income.  The model incorporates Level 3 assumptions such as cost to service, discount rate, prepayment speeds, default rates and losses. These inputs are provided by a third-party pricing service without adjustment. Mortgage servicing rights are carried at the lower of cost or fair value.

 

                 
The following table presents additional quantitative information about Level 3 assets measured at fair value on a nonrecurring basis.
                 
    Quantitative Information about Level 3 Fair Value Measurements
(Dollars in Thousands)   at September 30, 2012
                Range
Asset  Description   Fair Value   Valuation Technique   Unobservable Input   Weighted Average
Impaired loans (1)    $        10,404    Appraisal     Appraisal Adjustments (2)     0% - 70% (27%) 
             Cost to sell     5% - 25%  (7%) 
Other real estate owned                6,165    Appraisal     Appraisal Adjustments (2) 
             Cost to sell    8% (8%)
Mortgage servicing rights                   252    Discounted Cash Flow (3)     
                 
(1) Includes loans directly charged-down to fair value during the year-to-date period.        
(2) Qualitative adjustments  are discounts specific to each asset and are made as needed.        
(3) Valuation and inputs are determined by a third-party pricing service without adjustment.