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Fair Value Measurements | 9 Months Ended
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Sep. 30, 2012
Fair Value Measurements [Abstract] |
Fair Value Measurements | NOTE 10. Fair Value Measurements GAAP requires the Company to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. "Fair Value Measurements" defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
• Level 1 | Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
• Level 2 | Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
• Level 3 | Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The following sections provide a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy: Securities Available for Sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Interest Rate Swap: The fair value is estimated by a third party using inputs that are observable or that can be corroborated by observable market data, and therefore, are classified within Level 2 of the valuation hierarchy. The following table presents balances of financial assets and liabilities measured at fair value on a recurring basis at September 30, 2012 and December 31, 2011:
|  |  |  | Fair Value Measurements at September 30, 2012 Using
|  |  |  | Quoted Prices |  |  |  |
|  |  |  | in Active |  | Significant |  |
|  |  |  | Markets for |  | Other |  | Significant
|  | Balance as of |  | Identical |  | Observable |  | Unobservable
|  | September 30, |  | Assets |  | Inputs |  | Inputs
|  | 2012 |  | (Level 1) |  | (Level 2) |  | (Level 3)
|  |  |  | (in thousands) |  |
Assets: |  |  |  |  |  |  |  |
Securities available for sale |  |  |  |  |  |  |  |
Obligations of U.S. government |  |  |  |  |  |  |  |
corporations and agencies | $ | 16,726 | $ | - | $ | 16,726 | $ | -
Mortgage-backed securities |  | 26,209 |  | - |  | 26,209 |  | -
Obligations of states and |  |  |  |  |  |  |  |
political subdivisions |  | 43,842 |  | - |  | 43,842 |  | -
Corporate securities |  | 12,145 |  | - |  | 12,145 |  | -
Equity securities: |  |  |  |  |  |  |  |
Bank preferred stock |  | 2,264 |  | 2,264 |  | - |  | -
Total assets at fair value | $ | 101,186 | $ | 2,264 | $ | 98,922 | $ | -
Liabilities: |  |  |  |  |  |  |  |
Interest rate swap |  | 672 |  | - |  | 672 |  | -
Total liabilities at fair value | $ | 672 | $ | - | $ | 672 | $ | -
|  |  |  | Fair Value Measurements at December 31, 2011 Using
|  |  |  | Quoted Prices |  |  |  |
|  |  |  | in Active |  | Significant |  |
|  |  |  | Markets for |  | Other |  | Significant
|  | Balance as of |  | Identical |  | Observable |  | Unobservable
|  | December 31, |  | Assets |  | Inputs |  | Inputs
|  | 2011 |  | (Level 1) |  | (Level 2) |  | (Level 3)
|  |  |  | (in thousands) |  |
Assets: |  |  |  |  |  |  |  |
Securities available for sale |  |  |  |  |  |  |  |
Obligations of U.S. government |  |  |  |  |  |  |  |
corporations and agencies | $ | 18,533 | $ | - | $ | 18,533 | $ | -
Mortgage-backed securities |  | 34,546 |  | - |  | 34,546 |  | -
Obligations of states and |  |  |  |  |  |  |  |
political subdivisions |  | 45,766 |  | - |  | 45,766 |  | -
Corporate securities |  | 13,043 |  |  |  | 13,043 |  |
Equity securities: |  |  |  |  |  |  |  |
Bank preferred stock |  | 2,246 |  | 2,246 |  | - |  | -
Total assets at fair value | $ | 114,134 | $ | 2,246 | $ | 111,888 | $ | -
Liabilities: |  |  |  |  |  |  |  |
Interest rate swap |  | 580 |  | - |  | 580 |  | -
Total liabilities at fair value | $ | 580 | $ | - | $ | 580 | $ | -
Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower of cost or market accounting or write downs of individual assets. The following describes the valuation techniques used by the Company to measure certain financial and nonfinancial assets recorded at fair value on a nonrecurring basis in the financial statements: Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. The measurement of loss associated with impaired loans can be based on the observable market price of the loan, the fair value of the collateral securing the loan, or the present value of estimated future cash flows. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. Level 2 impaired loan value is determined by utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business' financial statements if not considered significant using observable market data. Level 3 impaired loan values are determined using inventory and accounts receivables collateral and are based on financial statement balances or aging reports. If the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old or has been discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the client and client's business, then the fair value is considered Level 3. Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. Other Real Estate Owned: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lesser of the fair value of the property, less estimated selling costs or the loan balance outstanding at the date of foreclosure. Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for loan losses. If there is a contract for the sale of a property, and management reasonably believes the contract will be executed, fair value is based on the sale price in that contract (Level 1). Lacking such a contract, the value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. After foreclosure, valuations are periodically performed by management and property held for sale is carried at the lower of the new cost basis or fair value less cost to sell. Any subsequent valuation adjustments are applied to earnings in the consolidated statements of income. Impairment losses on property to be held and used are measured as the amount by which the carrying amount of a property exceeds its fair value. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. The portion of interest costs relating to development of real estate is capitalized. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. We believe that the fair value component in its valuation follows the provisions of GAAP. The following table displays quantitative information about Level 3 Fair Value Measurements for certain financial assets measured at fair value on a nonrecurring basis for September 30, 2012:
| Quantitative information about Level 3 Fair Value Measurements for September 30, 2012
| Valuation Technique(s) | Unobservable Input | Range
Assets: |  |  |
Impaired loans | Discounted appraised value | Selling cost | 6% - 12%
Other real estate owned | Discounted appraised value | Selling cost | 6% - 12%
The following table summarizes the Company's financial and nonfinancial assets that were measured at fair value on a nonrecurring basis at September 30, 2012 and December 31, 2011:
|  |  |  | Carrying value at September 30, 2012
|  | Balance as of |  | Identical |  | Observable | Unobservable
|  | September 30, |  | Assets |  | Inputs |  | Inputs
|  | 2012 |  | (Level 1) |  | (Level 2) |  | (Level 3)
| (in thousands)
Financial Assets: |  |  |  |  |  |  |  |
Impaired loans | $ | 4,356 | $ | - | $ | 2,655 | $ | 1,701
Nonfinancial Assets: |  |  |  |  |  |  |  |
Other real estate owned |  | 2,364 |  | 193 |  | 2,171 |  | -
|  |  |  | Carrying value at December 31, 2011
|  |  |  | Quoted Prices |  |  |  |
|  |  |  | in Active |  | Significant |  |
|  |  |  | Markets for |  | Other |  | Significant
|  | Balance as of |  | Identical |  | Observable |  | Unobservable
|  | December 31, |  | Assets |  | Inputs |  | Inputs
|  | 2011 |  | (Level 1) |  | (Level 2) |  | (Level 3)
| (in thousands)
Financial Assets: |  |  |  |  |  |  |  |
Impaired loans | $ | 6,804 | $ | - | $ | 3,379 | $ | 3,425
Nonfinancial Assets: |  |  |  |  |  |  |  |
Other real estate owned |  | 2,378 |  | - |  | 1,742 |  | 636
The changes in Level 3 financial assets measured at estimated fair value on a nonrecurring basis during the nine months ended September 30, 2012 were as follows:
|  | Fair Value Measurements at September 30, 2012 |
|  | Impaired |  |  | Other Real |
|  | Loans |  |  | Estate Owned |
|  | (in thousands) |
Balance - January 1, 2012 | $ | 3,425 |  | $ | 636 |
Sales proceeds |  | - |  |  | - |
Valuation allowance |  | - |  |  | - |
(Loss) on disposition |  | - |  |  | - |
Transfers into Level 3 |  | 959 |  |  | - |
Transfers out of Level 3 |  | (2,683 | ) |  | (636 | )
Total assets at fair value | $ | 1,701 |  | $ | - |
GAAP defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than through a forced or liquidation sale for purposes of this disclosure. 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. 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. The following methods and assumptions were used to estimate the fair value of the Company's financial instruments: Cash and short-term investments/accrued interest: The fair value was equal to the carrying amount. Securities: The fair value, excluding restricted securities, was based on quoted market prices. The fair value of restricted securities approximated the carrying amount based on the redemption provisions of the issuers. Loans: The fair value of variable rate loans, which reprice frequently and with no significant change in credit risk, was equal to the carrying amount. The fair value of all other loans was determined using discounted cash flow analysis. The discount rate was equal to the current interest rate on similar products. Deposits and borrowings: The fair value of demand deposits, savings accounts, and certain money market deposits was equal to the carrying amount. The fair value of all other deposits and borrowings was determined using discounted cash flow analysis. The discount rate was equal to the current interest rate on similar products. Off-balance-sheet financial instruments: The fair value of commitments to extend credit was estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the credit worthiness of the counterparties. The fair value of fixed rate loan commitments also considered the difference between current interest rates and the committed interest rates. The fair value of standby letters of credit was estimated using the fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties. The carrying amount and fair value of the Company's financial instruments at September 30, 2012 and December 31, 2011 were as follows:
|  |  |  | Fair Value Measurements at September 30, 2012 Using |  |
|  |  |  | Quoted Prices |  |  |  |  |  |
|  |  |  | in Active |  | Significant |  |  |  |
|  |  |  | Markets for |  | Other |  | Significant |  |
|  | Carrying Value |  | Identical |  | Observable |  | Unobservable |  | Fair Value
|  | as of |  | Assets |  | Inputs |  | Inputs |  | as of
|  | September 30, 2012 |  | (Level 1) |  | (Level 2) |  | (Level 3) |  | September 30, 2012
|  |  |  |  | (in thousands) |  |  |  |
Financial Assets: |  |  |  |  |  |  |  |  |  |
Cash and short-term investments | $ | 21,812 | $ | 21,812 | $ | - | $ | - | $ | 21,812
Securities |  | 101,186 |  | 2,264 |  | 98,922 |  | - |  | 101,186
Restricted Investments |  | 2,777 |  | - |  | 2,777 |  | - |  | 2,777
Loans, net |  | 419,538 |  | - |  | 432,731 |  | 1,701 |  | 434,432
Accrued interest receivable |  | 1,923 |  | - |  | 1,923 |  | - |  | 1,923
Financial Liabilities: |  |  |  |  |  |  |  |  |  |
Deposits | $ | 457,178 | $ | - | $ | 458,504 | $ | - | $ | 458,504
Federal funds purchased and securities |  |  |  |  |  |  |  |  |  |
sold under agreements to repurchase |  | 10,000 |  | - |  | 10,122 |  | - |  | 10,122
Federal Home Loan Bank advances |  | 32,250 |  | - |  | 33,298 |  | - |  | 33,298
Trust preferred capital notes |  | 7,217 |  | - |  | 7,217 |  | - |  | 7,217
Accrued interest payable |  | 281 |  | - |  | 281 |  | - |  | 281
Interest rate swap contract |  | 672 |  | - |  | 672 |  | - |  | 672
|  |  | December 31, 2011 |  |
|  | Carrying Value | (in thousands) |  | Fair Value
|  | as of |  |  | as of
|  | December 31, 2011 |  |  | December 31, 2011
Financial assets: |  |  |  |  |
Cash and short-term investments | $ | 21,941 |  | $ | 21,941
Securities |  | 114,134 |  |  | 114,134
Restricted Investments |  | 3,520 |  |  | 3,520
Loans, net |  | 401,681 |  |  | 418,230
Accrued interest receivable |  | 2,037 |  |  | 2,037
Financial liabilities: |  |  |  |  |
Deposits | $ | 448,465 |  | $ | 449,990
Federal funds purchased and securities |  |  |  |  |
sold under agreements to repurchase |  | 10,000 |  |  | 10,350
Federal Home Loan Bank advances |  | 42,250 |  |  | 44,833
Trust preferred capital notes |  | 7,217 |  |  | 7,217
Accrued interest payable |  | 336 |  |  | 336
Interest rate swap contract |  | 580 |  |  | 580
The Company assumes interest rate risk (the risk that general interest rate levels will change) during its normal operations. As a result, the fair value of the Company's financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities in order to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay their principal balance in a rising rate environment and more likely to do so in a falling rate environment. Conversely, depositors who are receiving fixed rate interest payments are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting the terms of new loans and deposits and by investing in securities with terms that mitigate the Company's overall interest rate risk.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13504-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15C, 15D -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44A, 44B -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15A -Subparagraph a-d -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 3, 10, 14, 15 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13433-108611 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 159 -Paragraph 17-22, 27, 28 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13537-108611 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15B -Subparagraph a, b -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 157 -Paragraph 32, 33, 34 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7578670&loc=d3e19207-110258 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 + Details
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