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Fair Value of Financial Instruments
 12 Months Ended
Dec. 31, 2011
Fair Value of Financial Instruments [Abstract]  
Fair Value of Financial Instruments

Note 16 - Fair Value of Financial Instruments

Fair values of financial instruments are management’s estimate of the values at which the instruments could be exchanged in a transaction between willing parties. These estimates are subjective and may vary significantly from amounts that would be realized in actual transactions. In addition, other significant assets are not considered financial assets including deferred tax assets, premises, equipment and intangibles. Further, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered in any of the estimates.

The following assumptions and methods were used in estimating the fair value for financial instruments:

Cash and Cash Equivalents

The carrying amounts reported in the balance sheet for cash, cash equivalents and federal funds sold approximate their fair values. Also included in this line item are the carrying amounts of interest-bearing deposits maturing within ninety days which approximate their fair values. Fair values of other interest-bearing deposits are estimated using discounted cash flow analyses based on current rates for similar types of deposits.

Securities and Other Securities

Fair values for securities, excluding Federal Home Loan Bank stock, are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

Loans

Most commercial and real estate mortgage loans are made on a variable rate basis. For those variable-rate loans that re-price frequently, and with no significant change in credit risk, fair values are based on carrying values. The fair values of the fixed rate and all other loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.

Deposits

The fair values disclosed for deposits with no defined maturities are equal to their carrying amounts, which represent the amount payable on demand. The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair value at the reporting date. Fair value for fixed-rate certificates of deposit are estimated using a discounted cash flow analysis that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-Term Borrowings

The carrying value of short-term borrowings approximates fair values.

FHLB Advances

Fair values or FHLB advances are estimated using discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types or borrowing arrangements.

Accrued Interest Receivable and Payable

The carrying amounts of accrued interest approximate fair values.

Dividends Payable

The carrying amounts of dividends payable approximate their fair values and are generally paid within forty days of declaration.

 

Off Balance Sheet Financial Instruments

Fair values for off-balance-sheet, credit related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

The estimated fair values, and related carrying or notional amounts, for on and off-balance sheet financial instruments as of December 31, 2011 and 2010, are reflected below.

 

                                 
    (In Thousands)  
    2011     2010  
    Carrying     Fair     Carrying     Fair  

Financial Assets:

                                

Cash and Cash Equivalents

   $ 43,143     $ 43,143     $ 43,379     $ 43,379  

Securities - available for sale

     327,519       327,519       287,317       287,317  

Other Securities

     4,365       4,365       4,406       4,406  

Loans, net

     501,124       504,804       521,883       520,766  

Accrued interest receivable

     3,481       3,481       4,036       4,036  
         

Financial Liabilities:

                                

Deposits

   $ 739,382     $ 741,975     $ 724,513     $ 725,270  

Short-term debt

                                

Repurchase agreement sold

     52,440       52,440       51,241       51,241  

Federal Home Loan Bank advances

     16,662       16,638       29,874       30,764  

Accrued interest payable

     342       342       471       471  

Dividends payable

     890       890       894       894  
         

Off-Balance Sheet Financial Instruments

                                

Commitments to extend credit

   $ —       $ —       $ —       $ —    

Standby letters of credit

     —         —         —         —    

Fair Value Measurements

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2011 and 2010, and the valuation techniques used by the Company to determine those fair values.

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities in active markets that the Company has the ability to access.

Available-for-sale securities- When quoted prices are available in an active market, securities are valued using the quoted price and are classified as Level 1. The quoted prices are not adjusted.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Available-for-sale securities classified as Level 2 are valued using the prices obtained from an independent pricing service. The prices are not adjusted. Securities of obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. Substantially all assumptions used by the independent pricing service are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability. During 2010, local municipals were purchased that the

Bank evaluates based on the credit strength of the underlying project such as hospital or retirement housing. The fair value is determined by valuing similar credit payment streams at similar rates.

 

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset.

The following summarizes financial assets measured at fair value on a recurring basis as of December 31, 2011 and December 31, 2010 segregated by level or the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

                         

($ in Thousands)

   Quoted Prices in Active
Active Markets
for Identical Assets		     Significant
Observable
Inputs		     Significant
Observable
Inputs		  
December 31, 2011   (Level 1)     (Level 2)     (Level 3)  

Assets-(Securities Available for Sale)

                        

U.S. Treasury

   $ 26,691     $ —       $ —    

U.S. Government agency

     0       177,797       —    

Mortgage-backed securities

     0       55,413       —    

State and local governments

     —         53,917       13,701  
   

 

 

    

 

 

    

 

 

  

Total Securities Available for Sale

   $ 26,691     $ 287,127     $ 13,701  
   

 

 

    

 

 

    

 

 

  

 

                         
    Quoted Prices in Active
Active Markets
for Identical Assets		     Significant
Observable
Inputs		     Significant
Observable
Inputs		  
December 31, 2010   (Level 1)     (Level 2)     (Level 3)  

Assets-(Securities Available for Sale)

                        

U.S. Treasury

   $ 32,279     $ —       $ —    

U.S. Government agency

     165,703       —         —    

Mortgage-backed securities

     24,531       —         —    

State and local governments

     —         53,502       11,302  
   

 

 

    

 

 

    

 

 

  

Total Securities Available for Sale

   $ 222,513     $ 53,502     $ 11,302  
   

 

 

    

 

 

    

 

 

  

Most of the Company’s available for sale securities, including any bonds issued by local municipalities, have CUSIP numbers or have similar characteristics of those in the municipal markets, making them marketable and comparable as Level 2.

As of December 31, 2011, the Company classified only US Treasuries as Level 1 and considered all Government Agency and Mortgage-backed securities as Level 2. The Company does not believe the availability of quoted prices in active markets for these securities is any less available than in 2010. The Company is recognizing the interpretation of most other public companies as classifying as Level 2.

The Company also has assets that, under certain conditions, are subject to measurement at fair value on a non-recurring basis. At December 31, 2011 and 2010, such assets consist primarily of impaired loans. Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Company estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals).

At December 31, 2011 and 2010, impaired loans categorized as Level 3 were $1.9 and $4.4 million, respectively. The specific allocation for impaired loans was $175 and $632 thousand as of December 31, 2011 and 2010, respectively, which are accounted for in the allowance for loan losses (see Note 4).

Other real estate is reported at the lower of either the fair value of the real estate, minus the estimated costs to sell the asset, or the cost of the asset. The determination of the fair value of the real estate relies primarily on appraisals from third parties. If the fair value of the real estate, minus the estimated costs to sell the asset, is less than the asset’s cost, the deficiency is recognized as a valuation allowance against the asset through a charge to expense. The valuation allowance is therefore increased or decreased, through charges or credits to expense, for changes in the asset’s fair value or estimated selling costs.

The following table presents impaired loans and other real estate owned as recorded at fair value:

 

                                         
    Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2011  
($ in Thousands)   Balance at
December 31, 2011		     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)		     Significant
Observable Inputs
(Level 2)		     Significant
Unobservable Inputs
(Level 3)		     Change in
fair value for
twelve-month
period ended
Dec. 31,  2011		  

Impaired loans

   $ 1,854     $ —       $ —       $ 1,854     $ (150 ) 
           

Other real estate owned - residential mortgages

   $ 958     $ —       $ —       $ 958     $ (145 ) 
           

Other real estate owned - commercial

   $ 2,614     $ —       $ —       $ 2,614     $ (633 ) 
                                   

 

 

  
           

Total change in fair value

                                   $ (928 ) 
                                   

 

 

  

 

                                         
    Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2010  
($ in Thousands)   Balance at
December 31, 2010		     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)		     Significant
Observable Inputs
(Level 2)		     Significant
Unobservable Inputs
(Level 3)		     Change in
fair value for
twelve-month
period ended
Dec. 31,  2010		  

Impaired loans

   $ 4,369     $ —       $ —       $ 4,369     $ (850 ) 
           

Other real estate owned - residential mortgages

   $ 2,110     $ —       $ —       $ 2,110     $ (64 ) 
           

Other real estate owned - commercial

   $ 2,328     $ —       $ —       $ 2,328     $ —    
                                   

 

 

  
           

Total change in fair value

                                   $ (914 ) 
                                   

 

 

  

The Company also has other assets, which under certain conditions, are subject to measurement at fair value. These assets include loans held for sale, bank owned life insurance, and mortgage servicing rights. The Company estimated the fair values of these assets utilizing Level 3 inputs, including, the discounted present value of expected future cash flows. At December 31, 2011, the Company estimates that there is no impairment of these assets and therefore, no impairment charge to other expense was required to adjust these assets to their estimated fair values.