v2.4.0.6
Fair Value
3 Months Ended
Sep. 30, 2012
Fair Value Disclosures [Abstract]  
Fair Value Disclosures [Text Block]

Note 4 - Fair Value

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

 

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of 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.

 

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

Financial assets and financial liabilities measured at fair value on a recurring basis include the following:

 

Securities available-for-sale: When available, the fair values of available-for-sale securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs). For securities where quoted market prices are not available, fair values are calculated based on market prices of similar securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3 inputs). The fair value of the Level 3 security is obtained from a third-party pricing service. Discounted cash flows are calculated using spread to the swap and LIBOR curves. Rating agency and industry research reports as well as defaults and deferrals on the individual security is reviewed and incorporated into the calculation.

 

Loans held for sale: The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

 

Assets and liabilities measured at fair value on a recurring basis are summarized below, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

    Balance at
September 30,
    Fair Value Measurements at
September 30, 2012 Using
 
    2012     Level 1     Level 2     Level 3  
Assets:                                
Obligations of U.S. government-sponsored entities and agencies   $ 7,494     $     $ 7,494     $  
Obligations of states and political subdivisions     39,414             39,414        
Mortgage-backed securities – residential     47,255             47,255        
Collateralized mortgage obligations     11,425             11,425        
Trust preferred security     74                   74  
Loans held for sale     408             415        

 

    Balance at     Fair Value Measurements at
June 30, 2012 Using
 
    June 30, 2012     Level 1     Level 2     Level 3  
Assets:                                
Obligations of U.S. government-sponsored entities and agencies   $ 8,567     $     $ 8,567     $  
Obligations of states and political subdivisions     35,276             35,276        
Mortgage-backed securities - residential     49,331             49,331        
Collateralized mortgage obligations     12,097             12,097        
Trust preferred security     64                   64  
Loans held for sale     377             387        

 

There were no transfers between Level 1 and Level 2 during the first quarter of the 2013 fiscal year or the during the 2012 fiscal year.

 

The following table presents a reconciliation of the trust preferred security measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended September 30, 2012 and 2011:

 

    2012     2011  
Beginning balance   $ 64     $ 67  
Change in fair value included in other comprehensive income     10       (3 )
Ending balance, September 30   $ 74     $ 64  

 

The significant unobservable inputs used in the fair value measurement of the Corporation’s trust preferred security are probabilities of specific-issuer defaults and deferrals and specific-issuer recovery assumptions. Significant increases in specific-issuer default assumptions or decreases in specific-issuer recovery assumptions would result in a significantly lower fair value measurement. Conversely, decreases in specific-issuer default assumptions or increases in specific-issuer recovery assumptions would result in a higher fair value measurement.

 

Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. Financial assets and financial liabilities measured at fair value on a non-recurring basis include the following:

 

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

 

Financial assets and financial liabilities measured at fair value on a non-recurring basis are summarized below:

 

    Balance at
September 30,
    Fair Value Measurements at
September 30, 2012 Using
 
    2012     Level 1     Level 2     Level 3  
Impaired loans:                                
Commercial   $ 47     $     $     $ 47  
Commercial real estate:                                
Other     661                   661  
1-4 Family                                
Owner occupied     161                   161  
Non-owner occupied     458                   458  

 

    Balance at     Fair Value Measurements at
June 30, 2012 Using
 
    June 30, 2012     Level 1     Level 2     Level 3  
Impaired loans:                                
Commercial   $ 11     $     $     $ 11  
Commercial real estate:                                
Other     647                   647  
1-4 Family                                
Owner occupied     40                   40  
Non-owner occupied     438                   438  

 

Impaired loans, which are generally measured for impairment using the fair value of the collateral for collateral dependant loans, had a principal balance of $1,643, with a valuation allowance of $317 at September 30, 2012. As of June 30, 2012, impaired loans with a principal balance of $1,479 had a valuation allowance of $343. The resulting impact to the provision for loan losses was a reduction of $27 being recorded for the three month period ended September 30, 2012. For the three month period ended September 30, 2011, there was no additional provision for loan losses recorded.

 

The valuation technique used by an independent third party appraiser in the fair value measurement of collateral for collateral-dependent commercial real estate impaired loans primarily consisted of the sales comparison approach. The valuation technique used by an independent third party appraiser in the fair value measurement of collateral for collateral-dependent 1-4 family non-owner occupied impaired loans primarily consisted of the sales comparison and income approach. The significant unobservable inputs used in the fair value measurement relate to adjustments made to the value set forth in the appraisal by deducting estimated holding costs, costs to sell and a distressed sale adjustment. For the September 30, 2012 period, collateral discounts for commercial real estate impaired loans ranged from 30% to 39%, for 1-4 family owner occupied impaired loans ranged from 33% to 37% and for 1-4 family non-owner occupied impaired loans was 30%. For the June 30, 2012 period, collateral discounts for commercial real estate impaired loans ranged from 33% to 41% and for 1-4 family non-owner occupied impaired loans ranged from 15% to 39%.

 

Estimated fair value for cash and cash equivalents, certificates of deposits in other financial institutions, accrued interest receivable and payable, demand and savings deposits and short-term borrowings were considered to approximate carrying value. The methodologies for other financial assets and financial liabilities are discussed below:

 

Loans: Fair value for loans was estimated for portfolios of loans with similar financial characteristics. For adjustable rate loans that reprice at least annually and for fixed rate commercial loans with maturities of six months or less which possess normal risk characteristics, carrying value was determined to be fair value. Fair value of other types of loans (including adjustable rate loans which reprice less frequently than annually and fixed rate term loans or loans which possess higher risk characteristics) was estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar anticipated maturities resulting in a Level 3 classification. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price. 

 

Time deposits: Fair value of fixed-maturity certificates of deposit was estimated using the rates offered at September 30, 2012 and June 30, 2012, for deposits of similar remaining maturities. Estimated fair value does not include the benefit that result from low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market resulting in a Level 2 classification.

 

Federal Home Loan Bank advances: Fair value of Federal Home Loan Bank advances was estimated using current rates at September 30, 2012 and June 30, 2012 for similar financing resulting in a Level 2 classification.

 

Federal bank and other restricted stocks include stock acquired for regulatory purposes, such as Federal Home Loan Bank stock and Federal Reserve Bank stock that are accounted for at cost due to restrictions placed on their transferability; and therefore, are not subject to the fair value disclosure requirements. The Corporation’s lending commitments have variable interest rates and “escape” clauses if the customer’s credit quality deteriorates. Therefore, the fair values of these items are not significant and are not included in the following table.

 

The following table shows the estimated fair values of financial instruments that are reported at amortized cost in the Corporation’s consolidated balance sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

    September 30, 2012     June 30, 2012  
    Carrying
Amount
    Estimated
Fair
Value
    Carrying
Amount
    Estimated
Fair
Value
 
Financial Assets:                                
Level 1 inputs:                                
Cash and cash equivalents   $ 10,633     $ 10,633     $ 13,745     $ 13,745  
Level 2 inputs:                                
Certificates of deposits in other financial institutions     5,645       5,674       5,645       5,645  
Accrued interest receivable     1,145       1,145       1,043       1,043  
Level 3 inputs:                                
Loans, net     199,780       200,813       195,095       196,592  
Financial Liabilities:                                
Level 2 inputs:                                
Demand and savings deposits     199,700       199,700       200,011       200,011  
Time deposits     84,757       85,520       84,470       85,262  
Short-term borrowings     15,005       15,005       13,722       13,722  
Federal Home Loan Bank advances     6,427       7,377       6,446       7,398  
Accrued interest payable     62       62       56       56