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Fair Value Disclosures
 12 Months Ended
Dec. 31, 2012
Fair Value Disclosures [Abstract]  
Fair Value Disclosures
Note 19. Fair Value Disclosures

Certain assets and liabilities are recorded at fair value to provide additional insight into the Company's quality of earnings. Some of these assets and liabilities are measured on a recurring basis while others are measured on a nonrecurring basis, with the determination based upon applicable existing accounting pronouncements. For example, securities available for sale are recorded at fair value on a recurring basis. Other assets, such as, mortgage servicing rights, loans held for sale, and impaired loans, are recorded at fair value on a nonrecurring basis using the lower of cost or market methodology to determine impairment of individual assets. The Company groups assets and liabilities which are recorded at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1 considered highest and level 3 considered lowest). A brief description of each level follows.
Level 1 – Valuation is based upon quoted prices for identical instruments in active markets.
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 at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation includes use of discounted cash flow models and similar techniques.

The fair value methods and assumptions for the Company's financial instruments are set forth below.

Cash, Cash Equivalents and Interest-Bearing Deposits in Other Banks
The carrying values of cash equivalents, due from banks and federal funds sold approximate their relative fair values. As such, the Company classifies these financial instruments as Level 1.

Investment Securities
The fair values of investment securities are estimated by independent providers. In obtaining such valuation information from third parties, the Company has evaluated their valuation methodologies used to develop the fair values in order to determine whether the valuations are representative of an exit price in the Company's principal markets. The Company's principal markets for its securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in those markets. Fair values are calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. If these considerations had been incorporated into the fair value estimates, the aggregate fair value could have been changed. The carrying values of restricted equity securities approximate fair values. As such, the Company classifies investment securities as Level 2.

Loans Held for Sale
Loans held for sale are recorded at the lower of carrying value or market value. The fair value of mortgage loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies mortgage loans held for sale as nonrecurring Level 2.

Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. The fair values of performing loans are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest risk inherent in the loan. The estimates of maturity are based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions, and the effects of estimated prepayments. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Management has made estimates of fair value using discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, Management has no basis to determine whether the fair value presented above would be indicative of the value negotiated in an actual sale. As such, the Company classifies loans as Level 3, except for impaired loans. Fair values of impaired loans are based on estimated cash flows and are discounted using a rate commensurate with the risk associated with the estimated cash flows, or if collateral dependent, discounted to the appraised value of the collateral, less costs to sell. As such, the Company classifies impaired loans as Level 2.

Other Real Estate Owned
Real estate acquired through foreclosure is recorded at fair value. The fair value of other real estate owned is based on property appraisals and an analysis of similar properties currently available. As such, the Company records other real estate owned as nonrecurring Level 2.

Mortgage Servicing Rights
Mortgage servicing rights represent the value associated with servicing residential mortgage loans. Servicing assets and servicing liabilities are reported using the amortization method and compared to fair value for impairment. In evaluating the fair values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans. As such, the Company classifies mortgage servicing rights as nonrecurring Level 2.

Accrued Interest Receivable
The fair value estimate of this financial instrument approximates the carrying value as this financial instrument has a short maturity. It is the Company's policy to stop accruing interest on loans for which it is probable that the interest is not collectible. Therefore, this financial instrument has been adjusted for estimated credit loss. As such, the Company classifies accrued interest receivable as Level 2.

Deposits
The fair value of deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposits compared to the cost of borrowing funds in the market. If that value were considered, the fair value of the Company's net assets could increase. As such, the Company classifies deposits as Level 2.

Borrowed Funds
The fair value of borrowed funds is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently available for borrowings of similar remaining maturities. As such, the Company classifies borrowed funds as Level 2.

Accrued Interest Payable
The fair value estimate approximates the carrying amount as this financial instrument has a short maturity. As such, the Company classifies accrued interest payable as Level 2.

Off-Balance-Sheet Instruments
Off-balance-sheet instruments include loan commitments. Fair values for loan commitments have not been presented as the future revenue derived from such financial instruments is not significant.

Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These values do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on Management's judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial instruments include the deferred tax asset, premises and equipment, and other real estate owned. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.


Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The following table presents the balances of assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2012 and 2011.

 
 
At December 31, 2012
 
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
Securities available for sale
 
 
 
 
 
 
 
 
   Mortgage-backed securities
 
$
-
 
 
$
169,093,000
 
 
$
-
 
 
$
169,093,000
 
   State and political subdivisions
 
 
-
 
 
 
120,944,000
 
 
 
-
 
 
 
120,944,000
 
   Corporate securities
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
   Other equity securities
 
 
-
 
 
 
1,577,000
 
 
 
-
 
 
 
1,577,000
 
Total assets
 
$
-
 
 
$
291,614,000
 
 
$
-
 
 
$
291,614,000
 

 
 
At December 31, 2011
 
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
Securities available for sale
 
 
 
 
 
 
 
 
   Mortgage-backed securities
 
$
-
 
 
$
198,232,000
 
 
$
-
 
 
$
198,232,000
 
   State and political subdivisions
 
 
-
 
 
 
85,726,000
 
 
 
-
 
 
 
85,726,000
 
   Corporate securities
 
 
-
 
 
 
811,000
 
 
 
-
 
 
 
811,000
 
   Other equity securities
 
 
-
 
 
 
1,433,000
 
 
 
-
 
 
 
1,433,000
 
Total assets
 
$
-
 
 
$
286,202,000
 
 
$
-
 
 
$
286,202,000
 

Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis

The following table presents assets measured at fair value on a nonrecurring basis as of December 31, 2012 and 2011. Other real estate owned is presented net of an allowance for losses of $373,000 and $436,000, respectively. Impaired loans are presented net of their related specific allowance for loan losses of $3,539,000 and $2,058,000, respectively.

 
 
At December 31, 2012
 
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
Mortgage servicing rights
 
$
-
 
 
$
1,228,000
 
 
$
-
 
 
$
1,228,000
 
Loans held for sale
 
 
-
 
 
 
1,035,000
 
 
 
-
 
 
 
1,035,000
 
Other real estate owned
 
 
-
 
 
 
7,593,000
 
 
 
-
 
 
 
7,593,000
 
Impaired loans
 
 
-
 
 
 
13,923,000
 
 
 
-
 
 
 
13,923,000
 
Total Assets
 
$
-
 
 
$
23,779,000
 
 
$
-
 
 
$
23,779,000
 

 
 
At December 31, 2011
 
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
Mortgage servicing rights
 
$
-
 
 
$
1,581,000
 
 
$
-
 
 
$
1,581,000
 
Loans held for sale
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
Other real estate owned
 
 
-
 
 
 
4,094,000
 
 
 
-
 
 
 
4,094,000
 
Impaired loans
 
 
-
 
 
 
12,165,000
 
 
 
-
 
 
 
12,165,000
 
Total Assets
 
$
-
 
 
$
17,840,000
 
 
$
-
 
 
$
17,840,000
 


Fair Value of Financial Instruments

FASB ASC Topic 825, "Financial Instruments," requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, if the fair values can be reasonably determined. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques using observable inputs when available. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. FASB ASC Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The carrying amounts and estimated fair values for financial instruments as of December 31, 2012 were as follows:

 
 
Carrying
 
 
Estimated
 
 
 
 
 
 
 
 As of December 31, 2012
 
value
 
 
fair value
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
Financial assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
14,958,000
 
 
$
14,958,000
 
 
$
14,958,000
 
 
$
-
 
 
$
-
 
Interest bearing deposits in other banks
 
 
1,638,000
 
 
 
1,638,000
 
 
 
1,638,000
 
 
 
-
 
 
 
-
 
Securities available for sale
 
 
291,614,000
 
 
 
291,614,000
 
 
 
-
 
 
 
291,614,000
 
 
 
-
 
Securities to be held to maturity
 
 
143,320,000
 
 
 
150,247,000
 
 
 
-
 
 
 
150,247,000
 
 
 
-
 
Restricted equity securities
 
 
14,448,000
 
 
 
14,448,000
 
 
 
-
 
 
 
14,448,000
 
 
 
-
 
Loans held for sale
 
 
1,035,000
 
 
 
1,035,000
 
 
 
-
 
 
 
1,035,000
 
 
 
-
 
Loans (net of allowance for loan losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Real estate
 
 
245,046,000
 
 
 
244,365,000
 
 
 
-
 
 
 
4,865,000
 
 
 
239,500,000
 
   Construction
 
 
20,960,000
 
 
 
20,902,000
 
 
 
-
 
 
 
2,284,000
 
 
 
18,618,000
 
   Other
 
 
78,985,000
 
 
 
79,312,000
 
 
 
-
 
 
 
472,000
 
 
 
78,840,000
 
Municipal
 
 
14,685,000
 
 
 
16,058,000
 
 
 
-
 
 
 
-
 
 
 
16,058,000
 
Residential
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Term
 
 
378,258,000
 
 
 
390,223,000
 
 
 
-
 
 
 
6,302,000
 
 
 
383,921,000
 
   Construction
 
 
6,447,000
 
 
 
6,430,000
 
 
 
-
 
 
 
-
 
 
 
6,430,000
 
Home equity line of credit
 
 
98,381,000
 
 
 
99,038,000
 
 
 
-
 
 
 
-
 
 
 
99,038,000
 
Consumer
 
 
14,022,000
 
 
 
14,392,000
 
 
 
-
 
 
 
-
 
 
 
14,392,000
 
Total loans
 
 
856,784,000
 
 
 
870,720,000
 
 
 
-
 
 
 
13,923,000
 
 
 
856,797,000
 
Mortgage servicing rights
 
 
867,000
 
 
 
1,228,000
 
 
 
-
 
 
 
1,228,000
 
 
 
-
 
Accrued interest receivable
 
 
4,912,000
 
 
 
4,912,000
 
 
 
-
 
 
 
4,912,000
 
 
 
-
 
Financial liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
 
$
90,252,000
 
 
$
91,544,000
 
 
$
-
 
 
$
91,544,000
 
 
$
-
 
NOW deposits
 
 
147,309,000
 
 
 
141,436,000
 
 
 
-
 
 
 
141,436,000
 
 
 
-
 
Money market deposits
 
 
80,983,000
 
 
 
71,799,000
 
 
 
-
 
 
 
71,799,000
 
 
 
-
 
Savings deposits
 
 
135,250,000
 
 
 
126,142,000
 
 
 
-
 
 
 
126,142,000
 
 
 
-
 
Local certificates of deposit
 
 
218,571,000
 
 
 
223,748,000
 
 
 
-
 
 
 
223,748,000
 
 
 
-
 
National certificates of deposit
 
 
286,485,000
 
 
 
290,457,000
 
 
 
-
 
 
 
290,457,000
 
 
 
-
 
Total deposits
 
 
958,850,000
 
 
 
945,126,000
 
 
 
-
 
 
 
945,126,000
 
 
 
-
 
Repurchase agreements
 
 
101,504,000
 
 
 
101,504,000
 
 
 
-
 
 
 
101,504,000
 
 
 
-
 
Federal Home Loan Bank advances
 
 
181,401,000
 
 
 
189,321,000
 
 
 
-
 
 
 
189,321,000
 
 
 
-
 
Total borrowed funds
 
 
282,905,000
 
 
 
290,825,000
 
 
 
-
 
 
 
290,825,000
 
 
 
-
 
Accrued interest payable
 
 
619,000
 
 
 
619,000
 
 
 
-
 
 
 
619,000
 
 
 
-
 

The estimated fair values for financial instruments as of December 31, 2011 were as follows:

 
 
December 31, 2011
 
 
 
Carrying
 
 
Estimated
 
 
 
amount
 
 
fair value
 
Financial assets
 
 
 
 
Cash and cash equivalents
 
$
14,115,000
 
 
$
14,115,000
 
Interest-bearing deposits in other banks
 
 
-
 
 
 
-
 
Securities available for sale
 
 
286,202,000
 
 
 
286,202,000
 
Securities to be held to maturity
 
 
122,661,000
 
 
 
130,677,000
 
Restricted equity securities
 
 
15,443,000
 
 
 
15,443,000
 
Loans held for sale
 
 
-
 
 
 
-
 
Loans (net of allowance for loan losses)
 
 
851,988,000
 
 
 
866,442,000
 
Mortgage servicing rights
 
 
1,201,000
 
 
 
1,581,000
 
Accrued interest receivable
 
 
4,835,000
 
 
 
4,835,000
 
Financial liabilities
 
 
 
 
 
 
 
 
Deposits
 
$
941,333,000
 
 
$
921,388,000
 
Borrowed funds
 
 
265,663,000
 
 
 
273,568,000
 
Accrued interest payable
 
 
734,000
 
 
 
734,000