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Note 4 - Fair Value Disclosure Measurements
 3 Months Ended
Mar. 31, 2013
Fair Value Disclosures [Text Block]
NOTE 4 - FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. GAAP established a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

Level I:
Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II:
Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date.  The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.

Level III:
Assets and liabilities that have little to no pricing observability as of the reported date.  These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The following tables present the assets measured on a recurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

           March 31, 2013        
                         
(Dollar amounts in thousands)
 
Level I
   
Level II
   
Level III
   
Total
 
                         
Assets measured on a recurring basis:
                       
U.S. government agency securities
  $ -     $ 25,752     $ -     $ 25,752  
Obligations of states and political subdivisions
    -       94,462       -       94,462  
Mortgage-backed securities in government-sponsored entities
    -       65,026       -       65,026  
Private-label mortgage-backed securities
    -       4,697       -       4,697  
Total debt securities
    -       189,937       -       189,937  
Equity securities in financial institutions
    5       745       -       750  
Total
  $ 5     $ 190,682     $ -     $ 190,687  

           December 31, 2012        
                         
   
Level I
   
Level II
   
Level III
   
Total
 
                         
Assets measured on a recurring basis:
                       
U.S. government agency securities
  $ -     $ 24,960     $ -     $ 24,960  
Obligations of states and political subdivisions
    -       92,596       -       92,596  
Mortgage-backed securities in government-sponsored entities
    -       71,102       -       71,102  
Private-label mortgage-backed securities
    -       5,064       -       5,064  
Total debt securities
    -       193,722       -       193,722  
Equity securities in financial institutions
    5       745       -       750  
Total
  $ 5     $ 194,467     $ -     $ 194,472  

The Company obtains fair values from an independent pricing service which represent either quoted market prices for the identical securities (Level 1 inputs) or fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2).

Financial instruments are considered Level III when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.  In addition to these unobservable inputs, the valuation models for Level III financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly.  Level III financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.  The Company has no securities considered to be Level III as of March 31, 2013.

The Company uses prices compiled by third party vendors due to the recent stabilization in the markets along with improvements in third party pricing methodology that have narrowed the variances between third party vendor prices and actual market prices.

The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loan include: quoted market prices for identical assets classified as Level I inputs; observable inputs, employed by certified appraisers, for similar assets classified as Level II inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level III inputs.

The Company values other real estate owned at the estimated fair value of the underlying collateral less expected selling costs. Such values are estimated primarily using appraisals and reflect a market value approach. Due to the significance of the Level 3 inputs, other real estate owned has been classified as Level III.

       
             March 31, 2013        
                         
(Dollar amounts in thousands)
 
Level I
   
Level II
   
Level III
   
Total
 
                         
Assets measured on a non-recurring basis:
                       
Impaired loans
  $ -     $ -     $ 16,363     $ 16,363  
Other real estate owned
    -       -       2,155       2,155  

              December 31, 2012           
                                 
   
Level I
   
Level II
   
Level III
   
Total
 
                                 
Assets measured on a non-recurring basis:
                               
Impaired loans
  $ -     $ -     $ 17,600     $ 17,600  
Other real estate owned
    -       -       1,846       1,846  

The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis and for which the Company uses Level III inputs to determine fair value:

  Quantitative Information about Level III Fair Value Measurements  
(unaudited, in thousands)
 
Estimate
   
Valuation
Techniquest 		   
Unobservable Input
 
   
March 31, 2013
   
December 31, 2012
         
Impaired loans
  $ 16,363       17,600  
Appraisal of collateral (1)
 
Appraisal adjustments (2)
 
                     
Liquidation expenses (2)
 
Other real estate owned
  $ 2,155       1,846  
Appraisal of collateral (1), (3)
 

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable.

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

(3) Includes qualitative adjustments by management and estimated liquidation expenses.

The estimated fair value of the Company’s financial instruments is as follows:

   
March 31, 2013
 
   
Carrying
Value
   
Level I
   
Level II
   
Level III
   
Total
Fair Value
 
   
(in thousands)
 
Financial assets:
                             
Cash and cash equivalents
  $ 45,630     $ 45,630     $ -     $ -     $ 45,630  
Investment securities available for sale
    190,687       5       190,682       -       190,687  
Net loans
    399,322       -       -       402,219       402,219  
Bank-owned life insurance
    8,604       8,604       -       -       8,604  
Federal Home Loan Bank stock
    1,627       1,627       -       -       1,627  
Accrued interest receivable
    2,692       2,692       -       -       2,692  
                                         
Financial liabilities:
                                       
Deposits
  $ 591,497     $ 403,337     $ -     $ 190,881     $ 594,218  
Short-term borrowings
    5,240       5,240       -       -       5,240  
Other borrowings
    12,779       -       -       13,092       13,092  
Accrued interest payable
    468       468       -       -       468  

   
December 31, 2012
 
   
Carrying
Value
   
Level I
   
Level II
   
Level III
   
Total
Fair Value
 
   
(in thousands)
 
Financial assets:
                                       
Cash and cash equivalents
  $ 45,346     $ 45,346     $ -     $ -     $ 45,346  
Investment securities available for sale
    194,472       5       194,467       -       194,472  
Net loans
    400,654       -       -       390,206       390,206  
Bank-owned life insurance
    8,536       8,536       -       -       8,536  
Federal Home Loan Bank stock
    1,887       1,887       -       -       1,887  
Accrued interest receivable
    2,163       2,163       -       -       2,163  
                                         
Financial liabilities:
                                       
Deposits
  $ 593,335     $ 396,582     $ -     $ 196,122     $ 592,704  
Short-term borrowings
    6,538       6,538       -       -       6,538  
Other borrowings
    12,970       -       -       13,337       13,337  
Accrued interest payable
    492       492       -       -       492  

Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.

Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced liquidation sale.  If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.

If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or simulation modeling.  Since many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument.  In addition, changes in assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values.

As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company.

The Company employed simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices were not available based upon the following assumptions:

Cash and Cash Equivalents, Federal Home Loan Bank Stock, Accrued Interest Receivable, Accrued Interest Payable, and Short-Term Borrowings

The fair value is equal to the current carrying value.

Bank-Owned Life Insurance

The fair value is equal to the cash surrender value of the life insurance policies.

Investment Securities Available for Sale

The fair value of investment securities is equal to the available quoted market price.  If no quoted market price is available, fair value is estimated using the quoted market price for similar securities. 

Loans

The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality.  Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were used as estimates for fair value.

Deposits and Other Borrowed Funds

The fair values of certificates of deposit and other borrowed funds are based on the discounted value of contractual cash flows.  The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities.  Demand, savings, and money market deposits are valued at the amount payable on demand as of year-end.

Commitments to Extend Credit

These financial instruments are generally not subject to sale, and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure.