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Fair Value of Instruments
 3 Months Ended
Mar. 31, 2012
Fair Value of Instruments [Abstract]  
FAIR VALUE OF INSTRUMENTS

NOTE 2 FAIR VALUE OF INSTRUMENTS

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 elements.

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 price, 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, listed as “other securities”, 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 of 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 their 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 counter-parties’ credit standing.

The estimated fair values, and related carrying or notional amounts, for on and off-balance sheet financial instruments as of March 31, 2012 and December 31, 2011 are reflected below.

 

                                 
    (In Thousands)  
    March 2012     December 2011  
    Carrying
Amount		     Fair
Value		     Carrying
Amount		     Fair
Value		  

Financial Assets:

                                

Cash and Cash Equivalents

   $ 59,237     $ 59,237     $ 43,143     $ 43,143  

Securities - available for sale

     345,029       345,029       327,519       327,519  

Other Securities

     4,365       4,365       4,365       4,365  

Loans, net

     488,090       488,709       501,124       504,804  

Accrued interest receivable

     4,154       4,154       3,481       3,481  
         

Financial Liabilities:

                                

Deposits

   $ 763,821     $ 767,421     $ 739,382     $ 741,975  

Short-term debt

                                

Repurchase agreement sold

     50,073       50,073       52,440       52,440  

Federal Home Loan Bank advances

     16,645       16,625       16,662       16,638  

Accrued interest payable

     334       334       342       342  

Dividends payable

     890       890       890       890  

Fair Value Measurements

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis at March 31, 2012, December 31, 2011, 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 base 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 market place.

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 home. 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 March 31, 2012 and December 31, 2011 segregated by level or the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

                         

Assets and Liabilities Measured at Fair Value on a Recurring Basis (In  Thousands)

  
    Quoted Prices in Active
Markets for Identical		     Significant
Observable Inputs		     Significant
Unobservable Inputs		  
    Assets (Level 1)     (Level 2)     (Level 3)  
March 31, 2012                  

Assets-Securities Available for Sale

                        

U.S. Treasury

   $ 31,438                  

U.S. Government agency

           $ 182,910          

Mortgage-backed securities

             62,195          

State and local governments

     —         54,850     $ 13,636  
   

 

 

    

 

 

    

 

 

  

Total Securities Available for Sale

   $ 31,438     $ 299,955     $ 13,636  
   

 

 

    

 

 

    

 

 

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

Assets-Securities Available for Sale

                        

U.S. Treasury

   $ 26,691                  

U.S. Government agency

           $ 177,797          

Mortgage-backed securities

             55,413          

State and local governments

     —         53,917     $ 13,701  
   

 

 

    

 

 

    

 

 

  

Total Securities Available for Sale

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

 

 

    

 

 

    

 

 

  

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.

At March 31, 2012 and beginning 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 March 31, 2012 and December 31, 2011, 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 March 31, 2012 and December 31, 2011, impaired loans categorized as Level 3 were $1.87 and $1.85 million, respectively. The specific allocation for impaired loans was $191 and $175 thousand as of March 31, 2012 and December 31, 2011, respectively, which are accounted for in the allowance for loan losses (see Note 4).

Other real estate is reported at 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 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  March 31, 2012 (In Thousands)  
    Balance at
March 31, 2012		     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
three-month period
ended Mar. 31,  2012		  

Impaired loans

   $ 1,867     $ —       $ —       $ 1,867     $ —    

Other real estate owned - residential mortgages

   $ 996     $ —       $ —       $ 996     $ (12 ) 

Other real estate owned - commercial

   $ 2,571     $ —       $ —       $ 2,571     $ —    
                                   

 

 

  
                                    $ (12 ) 
                                   

 

 

  
                                         
    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 ) 
                                   

 

 

  
                                    $ (928 ) 
                                   

 

 

  

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 March 31, 2012 and 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.